What Many CRE Investors Are Thinking as Inflation Goes Up & Up

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.

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