March 10th, 2023
Each year, our industry experts evaluate and review the Raleigh, Durham, and greater Triangle commercial real estate market’s annual performance. We share activity and trends from the market data we analyzed and experienced in 2022 to activities we anticipate in 2023.
In this segment, we interviewed Greg Sanchez, SIOR, CEO to share his thoughts on investment sale trends.
To learn more about other property types click on office, land, life science, retail, healthcare, flex, or warehouse.
• The economic downturn and uncertainty surrounding 2022 played out very differently for each real estate sector, but demand certainly softened across the board due to increased interest rates.
• At the end of 2021, interest rates and cap rates were at historic lows. In March 2022, the FED began raising interest rates, which had an immediate impact on the investment sales market. The FED raising rates applied upward pressure on cap rates (downward pressure on pricing) for the following reasons:
• The reduced spread between cap rates and interest rates made it hard for buyers to get loans, as properties were not producing enough cash flow to cover the bank’s debt service.
• If lenders were willing to make loans, they were lending at lower Loan to Value ratios, requiring buyers to come up with more equity to close deals.
• For these reasons, buyers had to reduce offer prices to maintain healthy cash flows and have enough equity to close deals.
• The FED hiked rates 7 times in 2022, each time between 25 and 75 basis points. This drastic increase in interest rates created a lot of uncertainty as to where and when interest rates would stop rising. This caused many lenders to pause lending on certain property types, most notably office and life science office, for the second half of 2022.
• While the office and life science office investment markets ground to a halt by the end of 2022, the investment markets for retail, land, flex, and industrial remained fairly strong, even as pricing somewhat decreased for these asset classes.
• 2022 was unique in that it flipped market power from sellers to buyers, specifically cash buyers. In 2021, sellers were achieving and exceeding pricing targets, and, in many cases, got to choose a buyer from a pool of very qualified buyers. That changed in 2022.
• Many office properties listed for sale in 2022 were quietly withdrawn, as sellers were unable to find buyers who had the financing capabilities to close deals. Financing difficulties reduced the office buyer pool which further decreased demand for office product.
• In the retail and industrial markets, cash buyers and buyers who needed a small amount of financing were successful in negotiating and closing deals. Whereas in 2021, buyers were competing against other buyers to win deals, in 2022, sellers were competing to try to be selected by the few qualified buyers looking among many properties.
• The big winners in the investment markets were cash buyers, and as well as sellers who got deals done in early 2022, before the increasing interest rates began to impact pricing.
• Cash buyers were able to leverage their ability to close to negotiate prices down, especially as many buyers were squeezed out of the market due to increasing interest rates. The smaller buyer pool decreased demand, further decreasing prices, and increasing the leverage of cash buyers.
• Sellers who were able to exit in early 2022 were especially well positioned to take advantage of the shifting marketplace. These sellers were able to sell their property at, or close to, the record pricing we saw in 2021, and then re-invest as pricing cooled into 2022.
• Cash buyers will continue to be king as long as rates stay high. Buyers with long-term hold periods will be especially well positioned to take advantage of falling asset prices in the short term.
• Some experts are predicting that the FED will stop hiking rates by mid-2023, and while we don’t expect rates to decrease in the near term, the plateau of interest rates will allow the investment market to stabilize.
• There was so much uncertainty in 2022, that many buyers, sellers, and lenders took a “wait and see” approach.
• As rates stabilize, we anticipate that asset prices will adjust to the new normal, and we expect to see more deals happen as buyers, sellers and lenders agree more on valuations, cap rate returns and pricing.
• Cash buyers will have even more opportunity over the next 12-24 months. Many building owners got locked into very low interest rate loans pre-2022, some of which will be coming due in the next 12-24 months. Those owners will have to refinance their buildings to avoid a big balloon loan payoff. The current rate environment may make it hard to refinance lower occupancy buildings, which will force some owners to quickly sell their buildings to avoid a loan default. Cash buyers will have the ability to acquire these properties at a reduced price.
• Financing is the biggest challenge across the investment sales market. This impacts all asset classes, even ones that lenders are still willing to make loans for. As interest rates stabilize, we expect the investment market to normalize and for more deals to start getting done.
• The office investment market will still be challenged as office leasing has not yet ticked up. Companies are slowly bringing employees back to the office. Until the return to the office has solidified, we expect the office investment market to remain slow.
• A lot of buyers and sellers took a “wait and see” approach after interest rates started to rise significantly in 2022.
• As interest rates stabilize, there will be less uncertainty and we expect a higher transaction volume across all asset classes.
• In the face of a softening market, it becomes very important for buyers and sellers to be entrepreneurial and find creative ways to price, negotiate and close deals.
• Working with our clients to execute acquisition and disposition strategies remains extremely rewarding. The margin for error has decreased and every deal and opportunity counts for that much more.
As you look ahead, planning your CRE goals for 2023, let our real estate advisors help guide you with insider market knowledge and experience.
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