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Report: Capital Costs Increase, But Liquidity Gets Deals Done
The Federal Reserve’s continuous effective federal funds rate hike is making capital more expensive to borrow. According to CREXI’s Q3 2022 National Trends Report, this is putting the brakes on some commercial real estate transactions. On the other hand, cash-flushed investors are out in full force, pushing forward on deals and opportunities before the end of the year.
First, the mini elephant in the room is that transactions did slow during the past quarter, especially relative to the first half of 2022. Prices are undergoing moderate adjustments to take into account changing market conditions. Many investors stopped in-process deals as they attempted to figure out additional interest in their ROIs. Furthermore, the bid-ask gap continued widening, with a lengthier price discovery as part of the deal.
However, “with plenty of liquid capital still available, deals are getting done when buyers and sellers can agree on valuations,” the CREXI report said. Those buyers that have access to liquidity are able to deploy that cash toward top-performing sectors and markets, assuming both continue to provide good, projected yields. Another
“As such, deals are still getting done at a slightly slower clip,” the report said. Class A properties are closing more quickly than Class B and C, as investors continue their flight-to-quality focus. Another factor attracting attention is constraints on new supply. As such, “existing buildings attracted more attention and drove up valuations in Q3,” the CREXI analysts commented.
The report said that investors aren’t settling for “yesterday’s prices,” but instead are waiting to determine the best long-term ROI. Still, given the amount of liquidity still available, the CREXI analysts are forecasting that deals will continue getting done before the end of this year. Also driving investor interest is getting deals done before additional rate hikes and uncertainties that might crop up in 2023.
“Many buyers will become increasingly motivated to complete 1031 exchanges, while REITs and other institutional spenders seek value-add acquisitions to finish deploying 2022’s capital,” the report said.
- ◦Sale/Acquisition
- ◦Financing
- ◦Economy
