On Nov. 2, the Federal Open Market Committee implemented its sixth effective fed funds rate hike this year. This continues generating questions like “what’s next?” and “how long will this go on” and especially, “how does this impact commercial real estate?” In the days following the rate hike, commercial real estate experts attempted to answer these questions.
Marcus & Millichap analysts said that the “sheer magnitude and velocity of the interest rates changes over the past year have left financial and asset markets in a state of flux.” This is leading investors to catch up, while higher financing costs are impacting investment sales. Preliminary data shows that trading activity fell below that of the same period in 2021. “The compounding effects of multiple interest rate hikes has made it more challenging to complete commercial real estate transactions,” Marcus & Millichap said. But once interest rates stabilize, “this consistency will help investors come to agreement and close deals more readily.”
At the same time, an article written by JLL chief economist Ryan Severino pointed out that “commercial real estate remains a procyclical asset, so the economy will have much to say about its performance.” As such, each of the major property types will have its own challenges and opportunities in the current environment.
For example, Severino said that even if demands for goods slows down, “the structural changes in consumption patterns still present opportunities for industrial,” while “the evolution of retail continues.” Additionally, the apartment market should continue strong as the need for housing remains.
Marcus & Millichap analysts indicated that high cap rates highlight hotels; this property type has “changed hands over the past four quarters, with first-year returns averaging in the low-8% zone.” This has outpaced yields generated by other property types. Additionally, while senior housing occupancies are improving, Marcus & Millichap analysts pointed out that ongoing labor constraints and increasing operating costs could provide challenging.
Both reports indicated that the Fed will slow its rate hikes in the coming year. But by how much? No one really knows.
“It tentatively seems like some components of inflation are rolling over,” Severino observed. “Commodities like energy have already peaked and declined.” But while goods inflation is on a downward trend, services inflation continues to rise, he added.
Marcus & Millichap pointed out that the Fed understands that its rate hikes take time to siphon through the economy. But the Fed also wants to see specific evidence that inflation is winding down to the 2% range before stopping its increase. As such, this leaves the door open in 2023 as to where rates will ultimately land,” Marcus & Millichap said.
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