The Real Estate Capital Scoreboard® – August, 2022

 

Chicago, Illinois, August 1, 2022 – The American economy continues moving forward at a healthy pace based on strong corporate earnings and low unemployment, despite record inflation.  As a result, last month’s Fed meeting resulted in three-quarters of a point.  The Fed announced that additional rate hikes are possible as the central bank attempts to tame a 40-year-high inflation rate.  The stock market anticipated this rate hike, and the benchmark ten-year treasury dropped, hovering in the 2.75% +/- range.  Furthermore, the yield curve remains inverted, as markets expect some correction, perhaps even a mild recession.  High inflation persists, but the pressure may ease.

Commercial real estate capital markets readily absorb higher borrowing costs.  However, substantial pricing discounts for bargain hunters remain out of reach, particularly for multifamily and industrial assets.  Discounting of 10% to 15% from a year ago is considered a “fair” transaction.  However, most institutional properties continue showing strong performance, resulting in little need for lowering prices.  And even as mortgage rates and expenses rise, owners benefit from rising rents, staying in step with inflation.  For comparison, the best rates for longer-term permanent loans were in the 3.5% range at the beginning of this year, while today’s best rates fall in the 4.5% range.

Even as the best quality assets remain competitively priced, challenged property types, such as shopping centers, enjoy a price recovery of as much as 20% or more.  Over the past five to ten years, retail assets continued declining as shoppers moved to internet sales.  As sales tax loopholes disappear and shipping costs climb, consumers gradually return to brick-and-mortar facilities for shopping needs.  While major malls plagued by obsolete footprints remain undesirable, small retail strip centers are making a comeback as part of this trend.  Also, developers continue to build residential communities on large mall sites as part of denser urban and suburban planning, so financing for such ventures is readily available.

The Real Estate Capital Institute® director, John Oharenko, states, “Even as interest rates climb, overall real estate pricing remains attractive based on a limited supply of product, which is exacerbated by extremely costly new construction.”

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