The Real Estate Capital Scoreboard® – April, 2023

Chicago, Illinois, April 1, 2023 – The Fed raised rates by a quarter point despite the Silicon Valley Bank crisis last month.  Recent weeks proved to be a financial roller coaster as the ten-year treasury climbed above four percent (the highest rate since last fall), only to drop by more than half a percent by the end of the month.  The Fed’s bumpy strategy of taming inflation translates to the following pricing trends based on the “four food group” property types and ranked according to desirability:

Apartments:  Multifamily has been the strongest investment sector this century.  Extremely limited supply, unwavering demand, limited infill land, and rising construction costs provide ample reasons for remaining bullish on this sector.  Abundant and highly competitive financing options include attractively-priced government-backed programs (GSEs), institutional capital (life companies), local banks, and credit unions.  Capitalization rates start at about 4.5% for core, climbing to over 6% for value-add investments.   As interest rates rise, cap rates move up, but not proportionally — averaging around 5% compared to under 4% a year ago.  But the markets continue to fluctuate based on lending limits and restrictions and economic uncertainties that stifle investor appetites.

Industrial:  Despite a slowing economy, Industrial properties enjoy solid performance and rent growth for most subcategories.  Online shopping continues fueling warehouses and distribution centers, while the resurgence of domestic production aids manufacturing facilities.  Net lease deals attract passive investors, as pricing starts over the 6% range, with assets demonstrating income growth potential.

Retail:  The shopping center sector suffered terrible blows much of the past decade due to an oversupply of space and changing consumer habits.  However, retail assets show signs of recovery, particularly urban infill locations and assets with multiple-use potential.  Creative and opportunistic investors see attractive yields starting with higher single-digit cap rates.  As more shopping centers are updated and repurposed, expect tighter pricing in this sector.

Office:  This sector suffers as post-pandemic recovery brings fewer workers back to office buildings.  Lenders prepare for more foreclosures, while developers seek alternative-use solutions (multifamily, mixed-use, etc.)  The flight to quality remains the key theme for office investors.  Otherwise, for non-core properties, pricing is mostly based on conversion costs and redevelopment scenarios, in contrast to existing cash flows.  Double-digit returns reflect investors’ concerns about the office sector’s overall risk profile.

Mr. John Oharenko, director of the Real Estate Capital Institute®, advises, “A cooling economy bodes well for taming rising rates.  Hopefully, the effects of a slowing economy will  not substantially harm income streams.”

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