Chicago, Illinois, July 1, 2022 – The American economy witnessed the largest inflation surge in four decades. Policymakers underestimated the extent of inflation. In response, last month’s 75 basis point rate hike by the Fed represents a long-overdue correction of controlling inflation. As a result, real estate capital markets are responding as follows:
Hesitation: Lenders and investors spend more time evaluating deal opportunities and keeping a watch on mortgage pricing. Even though mortgage rates increased by 75 to 100 basis points during the past month, many sellers remain reluctant to adjust their prices. That said, active buyers continue pursuing prime properties even though many players remain cautious.
Readjusted Pricing: Patient buyers expect 5% to 8% discounts in pricing as compared to the previous quarter. Such buyers factor in higher debt costs in analyzing various types of investments. Although core-quality asset pricing remains relatively unchanged, value-add investments are expected to offer readjusted values as riskier ventures demand higher yields especially given more costly debt, priced in the 5% to 5.75% range.
Land Values: During the past few months, the rapid rise in construction costs and debt heavily weigh on new construction opportunities. With little relief, construction loan interest rates and carry costs have more than doubled this year. Developers expect land sellers to help absorb such costs by reducing prices. However, land owners with entitled sites within infill locations will continue to demand high prices as limited development options exist. Yet, for new construction, developers are adjusting return-on-cost and exit capitalization rates by at least 50 basis points higher to account for more uncertainty in capital markets.
Mr. John Oharenko, The Real Estate Capital Institute®’s director, suggests, “Recession fears surface, and the Fed takes more dramatic action to tame inflation. However, the enormous supply of equity capital searching for real estate yields remains unabated, assuring strong demand for properties even with more expensive debt.”