As we enter the final months of the year, the future is uncertain for the commercial real estate market as there are multiple factors that can change the landscape of the market in the coming months. Here are five important trends that investors will be watching closely as we enter the final quarter of the year and head into 2023:
1. Rising Interest Rates – If you have been following the debt market this past year, you are probably aware of the sharp increases in interest rates that have taken place over the last couple of months. At the start of the year, it was common for investors to achieve sub 4.00% interest rates which help increased market activity. As inflation and recession fears have continued to mount, the debt market has shifted considerably, and interest rates are now well above 6.00%. The Federal Reserve has increased the federal funds rate multiple times this year to combat inflation. In addition, bond/treasury yields, a key metric for CRE interest rates, are the highest they have been since 2007. Over the next couple months, it will be important to watch if interest rates continue to ascend aggressively and if lenders will tighten their loan parameters – both of which can have a significant impact on property values.
2. Inflation – Inflation is another key metric to watch over the closing months as it has continued to remain historically high. As a result, this can have a direct impact on the real estate market in a multitude of ways. This includes construction, debt, operating expenses, rent, vacancy, and other items that are related to ownership. As the cost of goods remain high, investors are forced to find ways to mitigate the risk of rising costs. According to the Consumer Price Index September publishing, inflation inched up to 8.2%. If inflation numbers continue to rise or remain stagnant, this can reverberate throughout the market heading into 2023.
3. CAP Rates/Property Values – For many asset classes over the last year, CAP rates have been lower than they have ever been, resulting in a seller’s market for many owners (CAP rate = net income ÷ purchase price). For multi-tenant retail in theCentral Valley, Q2 of this year featured the lowest average CAP rate of 6.11% since 2008. At the beginning of the year, buyers were plentiful as interest rates were low and there was a shortage of quality product on the market. As the year progressed, buyer conditions softened, interest rates climbed, and investor sentiment about the economy has grown increasingly uncertain. Traditionally speaking, commercial real estate values tend to lag external changes in the market. Leading into 2023, it will be important to watch if property values decline showing the impact of the abrupt changes in the economy and debt market that occurred over the summer.
4. Midterm Elections – No matter which side of the aisle you are on, elections always seem to have an impact on the real estate market. Often, investment activity in real estate slows as elections approach, as many await the outcome before investing their capital. A shift in political power federally and locally can change the landscape of the market and either bolster activity or halt it completely.
5. Looming Recession Fears – This year, the economy has experienced two negative quarters of GDP growth, although it is widely debated by economists and real estate professionals if we’re currently in a recession or trending that way. A recession can have a direct impact on commercial real estate in a variety of ways resulting in vacancies, rent collection, unemployment, weakened property values, and pessimistic investor sentiment softening the buyer pool. The economy can influence the commercial real estate market greatly and its performance these final months could offer investors a glimpse of what lies ahead in 2023.
Consult with an Investment Professional
Consulting with a local investment specialist that is in sync with the market will ensure you are receiving relevant information to help stay ahead of the market. The market changes daily and having accurate data specific to your market is vital to making successful real estate decisions. Understanding the underlying fundamentals of current market conditions as well as identifying trends are key components in determining which of three choices each investor faces — sell, buy, or hold.
John Kourafas, CCIM, is a Commercial Investment Advisor with the Visintainer Group in Fresno, CA. Formed in 2018 and built on a foundation of investment real estate, the Visintainer Group is a client-first commercial real estate firm. The Group has executed over $600 million in transactions across the United States. John specializes in commercial property acquisitions and dispositions for owners in the Central Valley, Sacramento, and Central Coast markets. He can be reached at 559.890.0419 or [email protected].