Archives for March 2023

Is the Tightening Cycle Nearing an End? Implications For CRE

Slowed Pace Of Rate Hikes Welcome News For Investors

• The 25 bps Fed Rate hike together with Chairmen Powell’s press conference tell us that the tightening cycle may be nearing its end
• Stable financial condition, even at higher rates than seen in 2019, will allow well positioned investors to more accurately value properties and make strategic decisions

Flattening Rate Trajectory Adds Clarity To Lending Markets

• The prospect of reduced interest rate volatility will allow lenders to narrow their safety spreads; thereby reducing lending rates
• Secure financing and less rapid changes to rates will give potential buyers the information they need to be active participants in the market

As Uncertainty Abates, Investors Can Better Lock in Strategies

• As volatility tappers and the expectation gap narrow, investors can more aggressively pursue properties
• As buyers obtain clarity sellers will be better suited to make decisions, aiding price discovery

*Fed Funds Rate through March 23; CPI through February
Sources: Marcus & Millichap Research Services, BLS, Federal Reserve

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What The Economy’s “March Madness” Means for CRE Investors

Rising Rates Spark Bank Failures; Government Response Rapid

• The banking industry recorded the 2nd and 3rd largest bank failure in U.S. history from March 10th to 12th, with Silicon Valley Bank and Signature Bank closing their doors
• The FDIC has pledged to insure all deposits at Silicon Valley Bank and expand the discount window, limiting spillover effects into other parts of the economy and banking sector

Expectations For March Fed Meeting Shifting Rapidly

• Prior to the banking crisis, expectations were for a 50 bps rise to the fed funds rate at the March 22nd meeting, based on Powell’s comments on Capital Hill
• Wall Street has reversed course after the bank closures, with the expectation favoring a 25-bps lift in the overnight rates

Takeaways for Commercial Real Estate Investors

• The slower pace of rate hikes will give CRE lenders and investors time to adjust and assess the market
• Investment market is to remain choppy in the near-term, but a more stabilized interest rate outlook will create narrowing of the buy-sell gap

Through March 15
Sources: Marcus & Millichap Research Services, CME Group

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What Long-Run CRE Deal Flow Trends Mean For Investors in 2023

The Forces Restraining Transaction Flow

• The Fed lifted rates by 300 bps in a 140-day span, forcing CRE investors to recalibrate their investment underwriting and strategies
• While the rapid rise of debt capital costs slowed deal flow, interest rates remain below their long-term average; as investors acclimate, activity could revive

Since 2000, Investment in CRE Has Risen Dramatically

• The retreat in transaction volumes in 2022 is negligible within the context of the sector growth over the last 2 decades
• In this time, CRE investors have navigated numerous down cycles only to return stronger

What Will It Take For Transaction Velocity To Rise?

• Investors have become increasingly sophisticated, information has improved dramatically and capital has become more prolific
• CRE investing has become more mainstream, bolstering deal flow during both upcycles and downturns

Includes apartment, retail, office, industrial, hotel and seniors housing sales $2.5 million and greater
Sources: Marcus & Millichap Research Services, Real Capital Analytics

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How Consumer Sentiment Impacts Commercial Real Estate

The Media Often Miss The Mark On CRE Demand

• Media reports attributing rising rents to the apartment demand slowdown are missing a crucial factor that influences space demand across CRE
• Consumer Sentiment fell to a record low late in 2022, but has begun climbing again

Consumer Sentiment Will Be A Force Shaping The CRE Outlook

• Consumer sentiment strongly influences household formation, and strong household formation numbers aid numerous types of commercial real estate
• Inflation and recession fears brought the metric down last year, but should expand again as consumers regain confidence in their financial situations

What Will Bolster Sentiment In 2023?

• Inflation and Fed actions shape the public opinion on the economy, if the Fed keeps rate movements small and inflation continues diminishing, sentiment should rise
• If the Fed can achieve this goal without sizable rate movement and avoid recession, consumers should regain confidence and CRE space demand should rise

*Through February
Sources: Marcus & Millichap Research Services, University of Michigan

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