The Real Estate Capital Scoreboard® – September, 2022


Chicago, Illinois, September 1, 2022 – During mid-summer, the inflation rate peaked at about 9%.  Simultaneously, the domestic economy witnessed the tightest labor market in the US labor market in fifty years, dropping to the mid-three-percent range.  Many observers think Fed responded too slowly by maintaining low rates, allowing inflation pressure to rise.  As a result, the Fed will have to catch up by aggressively raising interest rates to the more acceptable target 2%-range, pushing the unemployment rate to historical norms.  Under such monetary policy tightening, a [mild] recession is expected within the next year, as the Fed ratchets up interest rates by as much as 150 basis points above current levels.

As expected, rising interest rates are impacting commercial realty capital markets.  Home prices are starting to decline, tamed by higher mortgage rates for the first time in recent years.  As such, commercial real estate capital markets are showing signs of stress based on the following trends:

Caution Prevails:  Buyers react cautiously to new acquisitions based on economic pressures and rapidly increasing interest rates.  Shadows of doubt cloud cash flow projections, particularly for pricing financing options.  For example, during the past month, benchmark interest rates climbed about 50 basis points,

Income Growth:  Equity markets tumbled in the second quarter as all three indices were down, giving up a large portion of their gains over pre-COVID levels.  Multifamily rent growth has continued at historically strong levels, with year-to-date rent increasing by over 5%.

Property Sector Differentiation: Economic concerns have not dampened consumer spending despite rising inflation.  Solid sales fueled strong retail asset performance and expanded interest in the sector.  The industrial sector continued to experience high-growth rates and compressed capitalization rates due to continued demand for warehouse and logistics space in the new construction market.

The Real Estate Capital Institute® director, John Oharenko, states, “Tight labor markets fuel a strong economy, resulting in continued inflationary pressures.  Real estate capital markets, thus, should expect additional rate hikes from the Fed.”

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