CRE Markets Reset Expectations in Early 2023

As a recent report from LightBox notes, there’s been some relief from a negative ending to 2022, with property listing volumes down by half year over year in Q4, due to a developed bid-ask gap, higher financing costs, and inflation leading to increasing interest rate hikes from the Federal Reserve.

“Fast forward to midway through the first quarter of 2023. Inflation has slowed from its peak of 9.1% last summer, but is also showing its staying power, rising 0.5% from December to January to reach 6.4%,” the report said. “Consumer confidence remains positive, gas prices have dropped significantly and there are signs of improvement in the supply chain. The Fed’s February announcement of a 25 basis point (bps) interest rate increase helped ease some concerns and gave the market confidence that the aggressive 75 bps hikes of 2022 may be in the rearview mirror. While the economic pain is not over, this was a positive step toward normalcy.”

That said, some “key takeaways” from 2023 so far — which isn’t yet a quarter old — suggests against over confidence. One was that “uncertainty remains pervasive,” which continues a developing trend and concern that GlobeSt.com reported on in the fall. Investors want more confidence in how inflation and interest rates will move as well as pricing levels, which require more activity for adequate price discovery.

The lack of pricing certainty means that there is a property valuation reset on its way, so LightBox explained. “Until this occurs, a bid-ask spread will continue to slow investment activity.”

Another point of the firm is that while recession concerns have begun to recede, they are still afloat in the air. “There is much debate, but many are predicting a mild recession beginning in 2024, or no recession at all.”

The potential for a significant wave of distress exists, as “more than $1 trillion in loans come due in 2023-2025.” Everyone’s eyes are on the potential, because it would add supply to property markets and could undercut overall values. There are multiple factors, not just loans coming due but expiration of less expensive interest rate caps and slowing rent increases that push cap rates down, all playing a part.

These facts leave people watching to see how the second half of this year might play out. “Many experts are predicting stronger loan origination and transaction activity in the H2 2022 than in H1 2023 as the market adjusts to the new environment,” LightBox says.

It is also important to remember how quickly things can change. The report, which had been readied last week, couldn’t take into account rapidly evolving data and events, such as Fed Chair Jerome Powell’s congressional testimony and the likelihood of more rate hikes, or the Moody’s Analytics note that Class-A office was no longer necessarily a safe haven for investors and owners.