December Market Update
Commercial Real Estate Overview:
As expected the Fed increased the Fed Funds Rate 50 basis points (pbs), for a combined 425 bps of tightening’s in 2022, it is now forecast the rate to go above 5% during 2023 with 3 more hikes likely. The Fed moderated its aggressive tightening while still signaling to the market that interest rates will ultimately go higher.
Persistence is also the key, it seems rates will be persistently higher for persistently longer.
Multifamily is currently the highest performing of all asset classes. “As of the third quarter of 2022, multifamily vacancies are at 4.4%—a five-year low,” according to Moody’s Analytics.
It is our view, that property owners and investors with strong balance sheets understand how to take advantage of the ups and downs of the current landscape. There may be overleveraged owners during an economic downturn, this presents more seasoned owners and investors an opportunity to grow their portfolio at a lower cost.
The market presents many challenges which creates opportunities regardless of inflation, workforce management, and cyber risk as issues that will have the most impact on revenues over the next 12 to 18 months.
The inverted Yield Curve continues to drive many defeasance transactions, the cost of defeasance is the lowest it has been in years. There continues to be a steady number of deals getting done across most property types, including; Multifamily, Self-Storage, Retail, Industrial, Etc.. Because of higher rates the cost of defeasance is down, even zero or negative in many cases, the challenge is for the borrowers to find palatable refinance terms on new loans or sales that are attractive.