Deal Volume Expected To Stay Weak As Rates Rise

In a difficult rate environment, hotels and senior housing are likely to have greater activity than other property categories.

Expect the Federal Reserve’s latest 75 basis point rate hike to have little effect on the commercial real estate transaction volume, which is already down year over year.

According to new analysis from Marcus & Millichap, trading activity in recent months has fallen short of but is near same-quarter figures in 2019. However, according to the firm’s analysts, the compounding impacts of numerous interest rate hikes have made it increasingly difficult to conclude commercial real estate purchases. This constancy will help investors come to an agreement and close deals more readily if interest rates stabilize at a new, higher level, the author writes.

The Fed will probably wait until there is solid evidence that inflation is returning to the 2 percent objective before putting a stop to rate hikes, which leaves the door open in 2023. Experts in the CRE industry believe this is when the rate increases will end.

In this new climate, higher cap rate properties are doing better than others, such as hotels, which traded over the last four quarters with first-year returns in the low-8 percent range. Although hotel financing premiums are frequently higher, the company claims that performance gains are lowering investors’ perceptions of risk. Only 30 basis points separated the national occupancy rate for the year ending in September (62.2%) from the long-term mean, while average daily prices in September increased by 17 percent from the same time last year.The American Hotel & Lodging Association and Kalibri Labs predicted this month that the US hotel industry’s overall revenue will surpass 2019 levels by 14%, or over $12 billion.

With cap rates recently dropping into the mid-seven percent range, senior housing also offers relatively strong yields. And the deals are coming in thick and fast: in the first seven months of 2022, Walker & Dunlop sold $1.3 billion worth of senior housing and long-term care facilities, breaking all previous records. However, experts predict that labor concerns and increased operational expenses will continue to be challenges for the sector.

According to Julie Ferguson, executive vice president and senior living at Ryan Companies, the ownership and financial structure of a company [may affect] whether they’re able to manage through a fall in operating margin. There will be owners who, if their lease-up is not proceeding as planned or if their expenses exceed their budget, will not be able to contribute further working capital to projects. Given the numerous factors that go into these choices, it is difficult to predict whether there will be more or fewer of them in 2023.

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