A ‘Spooked’ Market Has CRE Buyers on Hold

It’s “pencils down” for many buyers right now, Colliers writes in its recent capital markets report, as many are waiting for interest rate stability.

“Stubborn inflation, geopolitical concerns, a strong US dollar, and fear of a recession have the market spooked, despite tremendous amounts of uninvested capital,” according to the report. “Today’s market conditions are abnormal.”

Buyers’ feelings are showing up in the numbers as each asset class faces challenges to go with uncertainty.

“There is little to suggest rapid market liquidity is coming,” Collier said. “Although, with October’s core CPI reading coming in below consensus, expectations for continued Fed action on the overnight borrowing rate are shifting, which in turn, may loosen liquidity in the quarters ahead.

“However, investors are facing higher borrowing costs, creating a wide bid-ask spread on deals in the market.”

Multifamily: ‘A Bright Spot,’ But Fundamentals Are Softening

Multifamily remains a relative bright spot, with Q3 volume stronger than any period outside of 2021 and the first half of 2022. However, fundamentals are starting to show signs of softening. Of all asset classes, multifamily has the lowest going in cap rates, Colliers said, however higher borrowing costs, record-low cap rates are unsustainable, and deals are falling out more frequently, also victims or higher insurance costs, particularly in Florida.

Office: Sales Volume Has Declined Each Quarter in 2022

The Q3 sales volume was well below the 2014-19 average, and it has declined each quarter of 2022 as return-to-office plans have stalled with transactional prices dropping in Q3, showing the most significant decline of all asset classes.

Rents are holding for the most part, but negatively speaking, concessions are up, sublease availability is growing, and absorption has been slow, Colliers said.

Industrial: Substantial Rent Upside is Possible

Transactional cap rates are yet to show meaningful upward momentum, but this is starting to change as new comps record, Colliers said.

Substantial rent upside is possible in this asset class, so deals are still trading. However, higher borrowing costs and low cap rates are causing deal volume to dry up, according to the report.

Retail: Volatility Defines This Asset Class

Volatility is the trend in retail investment sales volume and given the recent upheaval in the retail landscape, it is hard to pinpoint a “normal” for this asset class, Colliers said.

Inflation is not only weighing on consumers it’s affecting retailers, whose margins are being squeezed.

Hotel: Volume Falling, Sales Slowing

Volume is falling, and sales activity has slowed in three consecutive quarters, and while its cap rates are the highest of any major property type, “rising interest rates, on the surface, are not as impactful,” Colliers said. Additionally, inflation is causing hotel operations to rise while it battles continued tight labor markets.