From a yield viewpoint, it has outperformed other asset classes, and demand factors are still strong because homeownership costs continue to be staggeringly out of reach for many prospective buyers.
As the inflationary environment intensifies, multifamily deals with pre-existing loans and favorable interest rates will be the most popular in the coming months. Stabilized properties will also be in even greater demand because they can offer higher returns and more certainty, according to one industry veteran.
According to Otto Ozen, Executive Vice President of The Mogharebi Group, the asset class will continue to be a desirable inflation hedge because it has historically outperformed other asset classes from a yield perspective, and demand drivers are still strong given that the costs of homeownership are still staggeringly out of reach for many prospective buyers.
He claims that when mortgage rates increase, the affordability gap grows, raising the entry barriers for home buyers and ultimately pushing them into renting. Because of this change, the rental market will be robust and rental rate growth will outperform inflation.
At a panel discussion at GlobeSt’s upcoming Multifamily Conference in Los Angeles in October, Ozen will elaborate on these observations and provide more perspectives on what will make multifamily deals successful in the current environment. He says he’ll be keeping an eye on core inflation and interest rates going into 2023 to better understand transaction velocity. He mentions that value-add and opportunistic deals may start to slow down as the risk involved with these transactions increases as interest rates rise.
Until there is a feeling of interest rate stability, he predicts, “we will probably see a pricing disparity between buyers and sellers.” But despite rising rates and consistently greater down payments, “multifamily fundamentals remain strong. Buyers with surplus equity funds will probably be better positioned to take advantage of prospects with attractive deal criteria.
The SVN Vanguard team can help with your multifamily real estate needs. We can help you find the ideal multifamily property for sale or lease. Interested in discussing a sale-leaseback? Contact us.
As they deal with escalating inflation and rising interest rates in the US, foreign institutional investors are adjusting to market challenges.
According to the latest survey from AFIRE, the association for international real estate investors focused on commercial, foreign institutional investors are adapting to market headwinds as they struggle with increasing inflation and climbing interest rates in the US.
Gunnar Branson, the organization’s CEO, says in an examination of its most recent AFIRE International Investor Survey Summer 2022 Pulse, investors “all are fully aware of the current market issues.” The investors know, for instance, that US inflation has increased by more than 9% since January 2022; the Fed increased interest rates more than it has in nearly thirty years; we passed the six million COVID death mark globally; supply chains are still in disarray; and July 2022 was the 451st consecutive month with temperatures above the twentieth-century average. Countries all across the world have suffered from wildfires; some regions’ water supplies are at dangerously low levels, while others are under water as a result of unprecedented flooding. Of course, Russia also sparked a conflict in Ukraine.
Investors with and without US-based bases foresee difficulties in closing deals in both the US and, to a greater extent, in Europe due to economic uncertainties. Foreign investors are less bullish about both regions than in prior surveys, but they are more positive about the US than Europe. Branson notes that, in contrast to overseas investors (67%), Americans (92%) are more gloomy about the “inevitability” of a US recession.
Branson notes that 86% of respondents said inflation this year has actually been worse than expected, while 60% of respondents are observing an increase in cap rates and a flattening of institutional demand, and that “questions asked about inflation six months ago generate different answers when asked in July.” Additionally, respondents predict that this year there will be fewer funding available for development, refinancing, and acquisitions “across the board,” with debt for development predicted to experience the greatest fall. To make matters worse, more than three-quarters of those surveyed think that the US will experience a recession within the coming 12 months.
Though the rising cost of financing is having an impact on new cross-border ventures, Branson adds that it “may also encourage cross-border activity in new regions and markets.” Roughly 77% of respondents think that, if it occurs, the recession won’t be as bad as it was in the 1970s. This will result in improved ESG processes, special opportunities in strategic and specialty sectors, and a sharper focus on multifamily, single-family, and affordable housing.
Another top goal for survey respondents was energy independence, and over two-thirds said they are currently actively working to increase their energy efficiency. Eighty-two percent of respondents to the study think that the need for investors to address an ESG agenda will increase as a result of the global energy crisis. Additionally, 59% of investors give priority to projects that have previously earned certain sustainability certifications, such as LEED and BREEAM.
In contrast to US-based investors (31%), who place a higher premium on getting rid of outdated or inefficient assets, non-US investors (43%) are more inclined to focus on capital spending for sustainability improvements.
The SVN Vanguard team can help with your Commercial Real Estate needs. We can help you find the ideal commercial property for sale or lease. Interested in discussing a sale-leaseback? Contact us.
The emphasis of financial authorities is on examples, accounting modifications, and short-term loan concessions.
Four of the major financial regulatory organizations—Office of the Comptroller of the Currency, Treasury, Federal Deposit Insurance Corporation, and National Credit Union Administration—published a proposed revision to a 2009 policy governing commercial real estate loan accommodations and workouts in the Federal Register at the beginning of last month.
The Federal Reserve has since released its interpretation of the policy with a comment period concluding on November 14, 2022.
The proposed statement would update existing interagency guidance on commercial real estate loan workouts, add a new section on short-term loan accommodations, and “build on existing guidance on the need for financial institutions to work prudently and constructively with creditworthy borrowers during times of financial stress,” according to the proposal. According to the proposal, “The proposed statement would also address recent accounting changes on estimating loan losses and provide updated examples of how to classify and account for loans subject to loan accommodations or loan workout activities
The proposed statement was created in consultation with state bank and credit union regulators by the Board, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and the National Credit Union Administration (NCUA), and is identical to the one that was previously made public.
The initial 2009 declaration followed the Great Recession and a significant shakeout in the real estate market, among other factors. The pandemic’s experience and the numerous revisions that came about as a result of business closures that left many owners and investors in a bind are incorporated into the present suggested edition.
Two important initial concepts are still supported by the proposed statement. One, even if the amended loans have flaws, lending institutions who use “prudent CRE loan accommodation” won’t face criticism for doing so. The second is that modified loans won’t be adversely classified if the borrower has the capacity to repay them on fair conditions because the value of the collateral is lower than the loan balance.
Such arrangements are described as tools “to mitigate adverse effects on borrowers and would encourage financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations during periods of financial stress” in a new section on short-term loan accommodations.
Additionally, there are sections on CRE exercise examples and modifications to GAAP accounting standards since 2009.
It’s possible that the regulators are making preparations. The Fed had promoted low-interest rates for years in an effort to boost the economy before the epidemic struck. Due to the higher interest rates the Fed has imposed to combat inflation, many people in the real estate sector, particularly those who are relatively new to the sector and lack considerable prior expertise, have used leverage in ways that are hazardous. Many people in the CRE industry have recently complained to GlobeSt.com about lenders’ tightening underwriting requirements as projects come up for refinancing and they are unable to find anything at rates that are even close to what the original financing rates were. There can be a wave of adjustments and exercises that are required.
The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.
In the upcoming recession, the former US Treasury Secretary sees “significant ferment and opportunity” for the CRE markets.
Former US Treasury Secretary, Lawrence Summers, reassured CRE CEOs that “if the vehicle’s moving faster, we need a firmer brake, but it doesn’t imply we’ll hit the wall before the car stops” on a day when a stubbornly high inflation rate dashed hopes for a smooth landing for the US economy.
Hessam Nadji, CEO of Marcus & Millichap, conducted a wide-ranging online debate on Tuesday. In it, Summers projected that the Fed’s ongoing rate hikes will soon lead to a “recession of choice” that will end the record-breaking employment creation of the previous year.
Summers stated, “The Fed seeks to limit it by constraining demand by hiking rates. We have constant inflation owing to a conflict between supply and demand. My best judgment is that the economy will enter a recession and that employment creation will slow down in the coming year.”
The economy, and the CRE sector in particular, is far better prepared to survive an economic crisis than it was in 2008 when the housing market crashed, according to the former Treasury director.
Summers said, “We won’t see something like 2008 again,” pointing out how much less indebted homeowners have, how the inventory is not overstocked, and how much stronger and more cautious lenders are now than they were before the sub-prime crisis.
Summers suggested that the recession would not start for a few months since fundamentals like consumer spending are still strong and have some capacity to increase.
“It’s important to keep in mind that there is still a significant savings overhang. According to Summers, $2 trillion was the amount of money that individuals were unable to spend because of the epidemic.
Only $300 billion of the total had been spent; more than half was still in checking accounts. That seems to me that customers will persist. Due to discounted salaries, I don’t believe they will run out of money to spend,” he remarked.
Summers advised CRE participants not to assume that “structural” developments, such as the increase in remote work and the boom in e-commerce, that have been triggered by the epidemic, will have a detrimental influence on the demand for CRE.
Even in a year or two when there is no employment growth, there will be significant ferment and opportunity in the CRE markets, according to Summers.
The former US Treasury Secretary adds “Many individuals believe that working from home will be awful. That is untrue.” According to him, the movement of people into new areas creates a need for real estate. He also said that the pandemic’s quick rise in e-commerce increased the need for warehouses exponentially.
Summers believes hybrid work is here to stay in the office sector, but he does not think it will have the same impact on office footprints as some may anticipate.
Many will travel far away from work as the need to live closer to the workplace lessens. He said employers will become a little more tolerant of workers working from home as they make improvements to their oversight of remote workers.
But if employees work three days a week, the employers will want them to come in on those days, so there won’t be as much of an influence on office footprints, according to Summers.
The former Treasury Secretary made a forecast that is a sweet relief to the commercial real estate industry, stating that CRE, with cap rates presently averaging 5.7% across asset classes, represents an attractive investment option when compared to equities and bonds.
In the upcoming months and years, “the position of CRE in portfolios is going to be bigger,” Summers said.
According to Summers, commercial real estate should have a bigger presence in many portfolios. It is very tax advantageous, and it seems even better after taxes.
“A bond currently yields 3.3 percent, and that is all it will continue to yield after 10 years. Property values are far more likely to increase over ten years. It will rise, not fall.” he continued.
The SVN Vanguard team can help with your Commercial Real Estate needs. We can help you find the ideal commercial property for sale or lease. Interested in discussing a sale-leaseback? Contact us.
Although there has been a welcome decrease in commodity prices, interest rates are here to stay.
Commercial real estate experts won’t be overjoyed by the Federal Reserve’s September Beige Book, also known as the “Summary of Commentary on Current Economic Conditions by the Federal Reserve District.” However, the good news offers optimism for some reprieve in construction, while the bad news is already known.
First, the obvious bad: don’t expect an early end to interest rate hikes since “price levels remained substantially elevated,” which indicates that inflation is still occurring.
In spite of the fact that nine of the Fed’s 12 districts “reported some degree of moderation in their rate of increase,” indicating that at least the rate at which inflation was increasing had slowed, the report stated that “substantial price increases were reported across all districts, particularly for food, rent, utilities, and hospitality services.” That’s a crucial indicator that prices will finally stabilize. But it appears that is still a ways off.
“The Fed still has an inflation concern and is determined to front-load rate hikes as aggressively as possible,” says Jeffrey Roach, chief economist at LPL Financial.”If next week’s inflation report surprises positively, the chances of a 75-basis point boost later this month may grow.”
The Fed also pointed out that certain aspects of real estate still face difficulties. It was noted in the study that, “despite some reports of strong leasing activity, residential real estate conditions weakened noticeably as home sales fell in all twelve districts and residential construction remained constrained by input shortages. Commercial real estate activity softened, particularly demand for office space. “Loan demand was mixed; while financial institutions reported generally strong demand for credit cards and commercial and industrial loans, residential loan demand was weak amid elevated mortgage interest rates.”
The districts that specifically mentioned real estate included Boston, where the outlook deteriorated; Richmond, where activity was flat to slightly down, Atlanta, where there was a mix of commercial and residential real estate activity, Chicago, where construction and real estate declined slightly, and San Francisco, where residential activity slowed.
There were also some encouraging developments in the crucial field of materials. The report stated that lower fuel prices and a decline in overall demand helped to relieve cost constraints, particularly those related to freight transportation rates. However, manufacturing and construction input costs remained high. However, most contacts outside of the Federal Reserve system believed price pressures would last at least through the end of the year. “Several districts reported some tapering in prices for steel, lumber, and copper.”
The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.
Inflation and interest rate fears are dismissed by survey respondents, but the market may be due for a “recalibration.”
While CRE transactions may level off this year, investor sentiment is still positive, according to a recent Marcus & Millichap investor poll.
The headline index number of 159 in the mid-year poll is “somewhat similar to the path we witnessed in 2016,” according to John Chang of Marcus & Millichap, in which confidence somewhat dipped as rising interest rates bit into the market. But they’re not down as much as one might anticipate, he adds.
The index fell 12 points in 2016 and there was a flattening of CRE transactions. In what Chang refers to as a “very minor softening,” the index has dropped 11 points this year, and it might produce comparable outcomes.
According to him, “yes, the market is seeing a recalibration as investors redo numbers based on the increasing cost of capital, but the survey respondents aren’t telegraphing a substantial market change.”
The poll indicates that interest rates and inflation are the two main issues for investors. Almost 9% said they would buy more commercial real estate as interest rates rise, while more than two-thirds said they would not change their investment plans as rates rise.On the sell side, 77% claimed that the rate hikes had not changed their plans, and 11% claimed that they intended to sell more as a result.
The survey found that participants disregarded inflation even more. However, over 12% of respondents indicated they would buy more CRE. Twenty-four percent of respondents said they would buy less CRE. A higher percentage of investors overall indicated they would purchase more of the more inflation-resistant property types, such as flats, hotels, and self-storage, with 14.4% indicating they would do so.
In addition to rising interest rates, cap rates are anticipated to climb as well; according to 14% of investors questioned, cap rates will increase by 50 basis points or more during the next year. About 35% predict an increase of less than that, while 27% predict no change. According to Chang, yields and stability look appealing because there is still a lot of cash flowing into CRE.
Think about the fact that the year that just ended, in the second quarter of 2022, was by far the busiest for commercial real estate investment transactions ever, Chang advises. The upcoming year “will probably rank as the second most active year, even if activity slows down a little.
The SVN Vanguard team can help with your Commercial Real Estate needs. We can help you find the ideal commercial property for sale or lease. Interested in discussing a sale-leaseback? Contact us.
1. FUTURES MARKET FORECASTS 75 BP HIKE
- Fed Futures markets are now firmly predicting another 75-bps hike at the FOMC’s September meeting based on estimates from the Chicago Mercantile Exchange.
- Following the committee’s July meeting, future markets were initially forecasting a more moderate increase of 50 bps come the September meeting, as seen in May and June before the Fed turned up the heat. As of September 8th, 86.0% of the Fed Futures market forecasts a 75-bps hike at the Fed’s next meeting on September 20th-21st.
- Since late July, markets have digested several key data points, including above-expectations job growth, a rebound in consumer sentiment, and a modest but unconvincing decline in year-over-year inflation. During recent talks at the annual Jackson Hole Summit, Fed officials also maintained a relatively hawkish tone, signaling a sustained willingness to raise rates to tackle inflation.
2. BEIGE BOOK ANALYSIS
- The September 7th version of the Federal Reserve’s Beige Book shows that economic activity remains relatively unchanged across the nation compared to recent weeks, with most businesses reporting steady or growing activity.
- Most federal reserve districts reported steady consumer spending levels, but purchases are moving away from discretionary items and toward food and other essentials, and inflation pressures mount. Auto sales continued to be hampered by low inventory and high prices, while hospitality and leisure remained relatively strong throughout the summer.
- Commercial real estate experienced softened activity, particularly for office space. Loan demand was reportedly mixed with solid demand for credit cards and commercial and industrial loans, while residential (buying) demand continued to weaken in the face of rising mortgage rates.
3. CMBS DELINQUENCIES
- CMBS delinquencies registered a slight decline in August, falling eight bps to 2.93%, according to Trepp— it is the first time delinquencies have fallen below 3% since the COVID-19 pandemic began.
- Delinquencies have steadily declined over the past two years as most Commercial Real Estate segments recovered, but recent improvements in the Hotel and Retail sectors have fueled the latest reductions.
- August represents the 24th decline in CMBS delinquencies in the past 26 months. Industrial continues to boast the lowest delinquency rate of 0.51% through August. Multifamily follows close behind with a rate of 0.95%. The rate for Office stands at 1.5%, Lodging (Hotel) at 5.18%, and Retail at 6.45%.
4. SINGLE FAMILY RENTAL CMBS ISSUANCE
- A new report by Trepp looks at the rise in Single-Family Rental CMBS issuance in recent years, as the sector has risen from just 7.22% of all CMBS issuance in 2018 to 13.92% so far in 2022.
- According to the analysis, $73.53 billion of Single-Family Rental CMBS has been issued since 2013, dominated mainly by players such as Progressive Residential, CoreVest American Finance, Invitation Homes, and Tricon, which accounted for more than half of all SFR issuance. SFR issuance in 2021 was more than double its 2019 level.
- While it appears that SFR will remain a notable portion of the CMBS market for years to come, the sector has seen a similar slowdown in recent months as seen in the broader CMBS market. Trepp notes that a total of five new deals so far in Q3 totaled $2.11 billion, on pace to fall below the $7 billion total hit in Q2.
5. INDEPENDENT LANDLORD RENTAL PERFORMANCE
- The on-time collection rate for independently operated residential properties fell by 55 bps between July and August, landing at 79.7%, according to the latest Independent Landlord Rental Performance Report by Chandan Economics.
- Gateway markets have maintained higher on-time payment rates than units located elsewhere for eight consecutive months through August 2022. Measured month-over-month, gateway market on-time collection rates rose by 16 bps but are down 211 bps year-over-year. The July on-time rate for Gateway markets stands at 81.4%, while non-gateway markets registered an on-time rate of 79.5%.
- Sun Belt rentals have underperformed the rest of the US for five consecutive months, standing at 78.4% in August compared to 80.3% for non-sun belt rentals. The Sun Belt’s growing success has seen some affordability issues arise, as markets re-price more quickly than some existing residents can handle.
- 2-4 Family rentals maintained the highest on-time payment rate of all sub-property types in August, rising 52 bps month-over-month.
6. CONSUMER SENTIMENT
- Despite growing recession concerns over the summer, consumer sentiment appears to have stabilized. The University of Michigan’s final August Consumer Sentiment estimate was revised up from 55.1 to 58.2. Moreover, consumer expectations saw a significant revision from a previously estimated 47.3 to a final reading of 58.0.
- The Consumer Sentiment Index has risen from its all-time low level of 50.0 in June, climbing in consecutive months. The upswing has been widespread across most demographics, though lower-income consumers’ sentiment has risen higher in recent readings, even exceeding that of higher-income consumers, bucking the historical trend.
- Inflation expectations have also receded, falling from 5.3% in July to 4.8% in August.
7. JOBS REPORT
- The US economy added 315,000 jobs in July while the unemployment rate rose slightly to 3.7%, according to the Bureau of Labor Statistics.
- This month’s jobs report fell slightly below expectations and signaled a slight loosening in the labor market. Still, job-adds continue to be strong, notably in professional and business services, health care, and retail trade.
- The uptick in the unemployment rate primarily reflects the reentry of some workers into the labor force, as the US labor force participation rose to 62.4%. Average hourly wages also climbed, increasing 5.2% year-over-year.
- Professional business services employment climbed the most during the month (+68,000), followed by healthcare (48,000) and retail trade (44,000). Meanwhile, leisure and hospitality job gains receded from their recently typical high levels, remaining relatively unchanged from July.
8. MALL VISITS FALL ACROSS U.S.
- Globe Street reporting of an analysis by Placer.ai finds that visits to American malls have started to decline as inflation eats into consumers’ wallets, falling in August after two consecutive years of increases.
- Year-over-year foot traffic to indoor malls, open-air lifestyle centers, and outline centers declined during the month. Indoor malls saw the steepest fall from the month before, falling by 1.1% month-over-month.
- Despite the declines, their shallow nature presents a dose of optimism for brick-and-mortar businesses in the face of recent economic headwinds. According to the Placer.ai report, all three segments of the mall sector ended August more strongly than they began, with indoor malls and open-air centers posting their most significant week-over-week gain since June 27th. Moreover, Retail REIT Simon Property Group recently reported strong occupancy and leasing volume, showing a 26% year-over-year increase in sales per square foot through the second quarter of 2022.
9. MANUFACTURING PMI
- S&P Global’s US Manufacturing Index declined to its slowest growth rate since July 2020 during August, registering a reading of 51.5. An index reading above 50 indicates growing activity in the sector, while a reading below 50 indicates declining activity.
- New orders reportedly fell for the third consecutive month amid weak client demand caused by high inflation and rising economic uncertainty. Output also contracted for the second consecutive month.
- On the flip side, supply chain disruptions are reportedly the least severe that they have been since October 2020, while input price inflation was its slowest since January 2021.
10. POST-GFC HIGH FOR AD&C LOANS
- In the second quarter of 2022, acquisition, development, and construction (AD&C) loan volume reached its highest level since the Great Financial Crisis, according to an analysis by the National Association of Home Builders (NAHB).
- However, pushing up volume levels is a rise in loan balances stemming from homes remaining in inventory for longer as homebuying slows, filtering into a slowdown in home-building activity.
- Balances are expected to decrease in the coming months as rising borrowing costs slow the rate of new borrowing. According to NAHB’s latest survey on AD&C financing conducted in August, the average effective rate on AD&C loans rose across all loan types between Q1 and Q2. The rate on Land acquisition loans rose from 6.32% to 8.19 quarter-over-quarter. Land development loans saw rates climb from 7.85% to 9.55%. Speculative single-family loans saw rates rise from 7.38% to 8.48, while pre-sold single-family loan rates rose from 7.90% to 8.63%
SUMMARY OF SOURCES
- (1) https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html
- (2) https://www.federalreserve.gov/monetarypolicy/beigebook202209.htm
- (3) https://www.trepp.com/instantly-access-delinquency-report-august-2022?hsCtaTracking=6851c4cd-6d3a-4f5c-895d-3e93db2cd92b%7Cd6075c9b-7c7e-49f6-aec4-d810563171a9
- (4) https://www.trepp.com/trepptalk/single-family-rental-issuance-flourishes-will-lending-continuewhat-does-it-mean-for-affordability
- (5) https://www.chandan.com/_files/ugd/df56fe_4e79d75ae2db4bb9a890fbe35f9eb9bc.pdf
- (6) http://www.sca.isr.umich.edu/
- (7) https://www.bls.gov/news.release/empsit.nr0.htm
- (8) https://www.globest.com/2022/09/08/mall-visits-slump-as-inflation-heats-up/
- (9) https://tradingeconomics.com/united-states/manufacturing-pmi
- (10) https://eyeonhousing.org/2022/09/adc-loan-balances-rise-as-sales-slow/?_ga=2.64372591.1796051761.1662673965-1254428321.1662496463
In the first half of the year, fewer than 80,000 new households were built, which cooled the market as economic headwinds accelerated.
After a protracted period during which the asset class was experiencing high demand, the third quarter saw a slight decline in demand for multifamily housing as household formation returned to normal and inflation started to affect consumer budgets.
According to a recent Marcus & Millichap analysis, the average effective monthly rent in the United States increased by almost 16 percent in 2021, with certain Sun Belt markets seeing increases of more than 25 percent in just the previous year. But as economic headwinds accelerated, 80,000 fewer households were generated in the first half of the year, depressing the market.
Nevertheless, the research observes that “even with a slower second half, vacancy at midyear leaves ample leeway before rates in most metros approach pre-pandemic levels.” Overall, according to Marcus & Millichap experts, the sector’s future is still promising.
“Despite the 60 basis-point rise in national apartment vacancy during the first half, approximately 20 percent fewer rentals available at midyear across the U.S. compared to year-end 2019,” they claim. “These circumstances and the steep barriers to homeownership support sustained momentum in the apartment sector.”
Over the past two years, the median price of a single-family house has increased by more than 30%, and mortgage rates have reached levels that many customers haven’t experienced in their adult lifetimes. Has a single-family median price. Additionally, according to the firm, “this is widening the affordability gap, or the difference between an average monthly payment on a median priced home and an average rent obligation.” The affordability gap is now more than $1,000 per month, which is roughly three times the size of pre-pandemic norms.
According to the research, “the cost-saving benefits, coupled with lifestyle elements, locational advantages, and flexibility, will sustain apartment demand.”
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RSM reported that sales volume and cap rates were slightly easing.
According to a study this week from RSM, real estate funds seem to be maintaining their path and accounting for a small overall cooling of the market.
The volume of sales transactions and associated cap rates realized in those transactions have both decreased, it was claimed, and fundraising is adopting the same mentality.
Since interest rate increases and inflationary pressures suggest that a possible impending recession may be imminent, investors are currently on the defensive and reevaluating values and strategy. RSM stated that capital is being directed toward core and core-plus assets, value-add investments, and less risky initiatives.
Real estate investment may have slowed down from its record-breaking rate in 2021, but prices are still significantly higher than they were before the pandemic, and there is still enough of money for investors to keep spending.
Finance Is Generally Affordable
According to RSM, property cash flow, particularly from multifamily and industrial properties, is still strong, and financing is still quite affordable.
According to the statement, “We anticipate transaction volume to pick up in the fourth quarter of 2022 or early 2023 as fund managers reevaluate their strategy and the return expectations of their investors, looking to deploy cash that has been sitting on the sidelines.”
Cap rate compression on a global scale
Even the “darlings” of the pandemic, multifamily and industrial, saw cap rates compressed.
Compared to an average reduction of 0.15% over the preceding three years, multifamily cap rates have decreased by 0.79% since the second quarter of 2020, according to CoStar.
RSM claimed that because of growing values, it has become harder for acquisitions to meet investment objectives.
The SVN Vanguard team can help with your Commercial Real Estate needs. We can help you find the ideal commercial property for sale or lease. Interested in discussing a sale-leaseback? Contact us.
In addition, if compared to the past, would “high” inflation actually be that high?
According to a Bloomberg story, if you believe that rising inflation is only a transitory issue and that everything will return to normal before the pandemic, you disagree with some of the largest bond investors in the world. They believe that the Federal Reserve’s target of 2% inflation is essentially an impossible dream, which is why they have piled up on inflation-protected bonds, increased their exposure to commodities, and maintained a sizable cash reserve.
Cheap energy and labor kept inflation low over a protracted period of growing globalization. (A sober addition would likely be the long-term cheap monetary supply that central banks kept thinking would boost GDP.)
But it’s time to take a deep breath. Look up the U.S. yearly inflation rate for the past few years. The Fed’s goal inflation rate of 2% was greatly exceeded for numerous stretches. The commercial real estate market did not collapse.Looking at the recent past is something that might confuse people. According to Kevin Swill, CEO of Thirty Capital Financial, “to have a market, with low interest rates for more than 12 years, does not follow logic or the cycle that existed for decades.”
However, returning to normal does not guarantee that it will be painless, especially in light of the investment methods that were used in conjunction with those low rates. “Levered investors might struggle to cover debt service and secure loans if cap rates spreads to interest rates narrow,” said DWS Group’s U.S. Real Estate Strategic Outlook for July. “Real estate leasing could also retrench amid job losses and dwindling profits. Indeed, recessions have been the proximate cause of every broad-based decline in real estate prices since the early 1960s.”
Additionally, as the Fed attempts to restrain growth, increasing inflation will result in continuous higher interest rates. That will have an impact on the price of finance as a whole.
Peter Tuffo, president of the south region for Suffolk Construction, claims that the real-estate industry runs on credit and the fundamentals of real estate are out of balance. Real estate investment is tied to confidence, and some projects are simply not penciling out. Real estate responds negatively to higher risk.”
Rogelio Carrasquillo, managing shareholder and cofounder at Carrasquillo Law Group, tells GlobeSt.com that “this situation has a significant effect on bridge and short-term loans that become more expensive for developers. As a result, programs such as EB-5 and other alternative sources of financing that would not be considered otherwise, become viable alternatives for the financing and development of commercial real estate projects.”
Even said, not all is lost because, according to Zachary Streit, founder and managing partner at WAY Capital, “inflation could also mean higher rent growth and NOI that could offset some of the impact of higher interest rates.” Additionally, “We are seeing a trend of more deals getting done with fixed rate financings and some sort of partial recourse or creative financing structures like PACE to offset today’s higher rates offered by floating rate lenders.”
The SVN Vanguard team knows investors need an experienced commercial property management company by their side. Contact us for multifamily, industrial, office, retail, and general commercial properties for sale.
