After decades of growth bolstered by low interest rates and easy credit, commercial real estate has hit a wall.

Office and retail property valuations have been falling since the pandemic changed where people live and work, and how they shop. The Fed’s efforts to fight inflation by raising interest rates have also hurt the credit-dependent industry.

The effects have been felt around the world, with banks from the US to Japan, Switzerland and Germany forced to write off billions in bad debts. Shares of New York Community Bancorp — battered by real estate losses — are down 66% so far this year.

But some analysts are beginning to see light at the end of the tunnel.

Tracy Chen, a portfolio manager at Brandywine Global, says that she’s starting to see some upside in commercial mortgage-backed securities (CMBS). Those are bonds backed by a pool of commercial real estate loans and secured by properties like office buildings, retail shops and apartments.

In fact CMBS with a BBB rating — as measured by indexes compiled by the Intercontinental Exchange and Bank of America — have done better than Treasuries, corporate bonds and other types of loans so far this year. Chen says that’s a good leading indicator for the rest of the commercial real estate market.

Before the Bell spoke with her about finding pockets of optimism in CRE.

This story has been edited for length and clarity.

Before the Bell: We often hear about how bad things are for the commercial real estate market and how it could really hurt the US economy. Is that doom and gloom overstated?

Tracy Chen: I definitely think so. The CRE market is very rate sensitive. If we are at the peak of interest rates, and if the Fed pivot (to cutting rates) happens, that will be tremendously beneficial for the CRE market. Even a marginal reduction of interest rates should be a tremendous help in lifting sentiment. I think that the gloomy sentiment around the CRE market is a little overdone.

It looks like the Fed may be holding interest rates steady for the time being. Does that present problems for CRE?

That could mean it takes longer for the CRE market to recover. It is extremely sensitive to interest rates. It’s so levered, and there is not enough transparency or transactions right now. So you definitely need some price adjustment (drops) going forward.

What’s the significance of commercial mortgage-backed securities outperforming Treasuries or corporate bonds?

There are many factors that are set up for outperformance in the CMBS market. First of all, most of the bad news is already priced in. Banks aren’t totally marked down, but the CMBS market is more transparent. When people invest in the CMBS market, they have all kinds of assumptions. I think those assumptions are quite draconian right now. So the pessimistic market sentiment is reflected in the CMBS market more than in the banking sector or the private credit sector.

The CMBS market also has a smaller share in CRE lending, just a bit over 10%, whereas regional banks have the biggest share. So even though CMBS has a smaller share it’s the most transparent in terms of pricing in bad news. And right after the Fed paused interest rate hikes, it had a strong recovery and rally year-to-date.

I take that as a signal of a potential turn in the CMBS market in terms of the market sentiment. I would say this probably is a forerunner to the CRE market recovery.

But do you expect regional banks like New York Community Bank to continue to struggle?

New York Community Bank has an idiosyncratic problem. I don’t think that’s prevalent in the rest of the CRE market. They were very concentrated in New York City multi-family homes, which have rent control issues. I don’t think that’s representative of the CRE market.

In general, do you believe that these regional or smaller banks will continue to see CRE-related losses?

I believe some of the regional banks are very under-reserved in terms of potential losses, so they probably will have some pain going forward. But I don’t think they can trigger systemic risk. And it will take time to recover from the pain associated with the CRE market. It will take years for those loans to work out. It will be a very prolonged reckoning.

What should Before the Bell readers take away from this information?

It’s not just all gloom and doom in the CRE market. You see a silver lining in the CMBS market. And commercial real estate isn’t all about office space, there’s a broad spectrum of property types, and some are doing really well. Suburban offices are doing well, so are Class A buildings, which are in short supply. And buildings built after 2010 have been in demand. I don’t think people should paint a broad brush and stay away from anything related to the CRE market, you can definitely get good investment returns if you do your work.

So there’s room for some optimism?

We have been seasoned CMBS investors for quite a long time, for more than a decade. We’ve been through the retail story where you had 5,000 to 6,000 store closures each year. But now look what’s happened, they’ve rationalized the supply and at the same time people are still going to stores. Any retail that survived Covid is good retail and so people are feeling confident about investing in retail property. Why shouldn’t the same thing happen to offices in the future? There is lots of hope for the future.

The US economy is so strong that there might not be any rate cuts in 2024. 2024 was supposed to be the year consumers could start breathing again.

After more than 20 months of inflation and higher borrowing costs, investors, economists and — eventually — Federal Reserve officials said they expected the economy to soften this year, allowing the central bank to finally start cutting rates.

But those expectations of a Fed pivot keep getting pushed back. While the market initially expected six rate cuts this year, starting in March, that’s now off the table.

“I don’t think it’s likely that the committee will reach a level of confidence by the time of the March meeting to identify March as the time to do that,” Fed Chair Jerome Powell said of possible cuts at the Fed’s January meeting.

Now, some economists think the Fed won’t cut interest rates at all this year.

The economy is not slowing down and some underlying measures of inflation are growing, said Torsten Slok, chief economist at Apollo Global Management, in a note to investors Friday.

“The Fed will not cut rates this year and rates are going to stay higher for longer,” he added.

Richmond Federal Reserve President Tom Barkin echoed the idea that the central bank may not cut interest rates this year.

“We’ll see,” Barkin said in an interview with CNBC on Friday morning. “I’m still hopeful inflation is going to come down, and if inflation normalizes then it makes the case for why you want to normalize rates, but to me it starts with inflation.”

OPEC+ members extend oil output cuts through June

OPEC+ member nations have agreed to extend their voluntary cuts to crude oil production through the second quarter, the group announced Sunday. The move is a part of the group’s perpetual balancing act to stabilize oil prices by reducing supply, reports my colleague Eva Rothenberg.

OPEC+, a coalition of the world’s top oil producing countries, had announced voluntary oil cuts of 2.2 million barrels per day in November. Sunday’s extension loosened some of the larger production stoppages. Saudi Arabia, the leading oil exporter, will still cut 1 million barrels per day, but Russia and Iraq will cut 471,000 and 220,000 barrels, respectively, a downward adjustment from the 500,000 and 223,000 barrels each country initially announced.

Since November, Brent crude, the global benchmark, has risen by nearly $2 a barrel, up to $83.46. Production cuts and the subsequent increase in barrel prices which typically follow can also raise retail gas prices at the pump.

But while drivers in the United States have seen rising prices per gallon and AAA has anticipated a spike around the spring break travel season, analysts have said a surge in crude oil prices is unlikely. It is largely because robust production in the United States is keeping oil prices down, which is partially why OPEC+ increased its cuts in the first place.

In December, Goldman Sachs cut its forecast for this year’s average oil price by 12%, saying the intensity of oil drilling in the United States would keep Brent from reaching its initial estimate of $92 a barrel. Instead, the bank’s analysts predict Brent will average $81 a barrel in 2024.