The US commercial real estate market slowed for the first time in 13 months as rising interest rates and inflation raised concerns across the sector.
Commercial property sales for April fell 16% from the same month in 2021 to $39.4 billion, according to an MSCI Real Assets report last month.
In contrast, total commercial property sales in March were 57% higher than in the same month a year earlier.
The RCA CPPI National All-Property Index for April showed commercial property prices rose 17.9% from a year ago, at a similar pace to previous months since the start of the year.
The commercial sector was particularly hard hit in the first year of the pandemic, after thousands of hotels, entertainment venues, retailers and offices across the country closed, with millions of Americans laid off or fired. home to work remotely.
The market saw a slow rebound in December 2020 as investors took advantage of vacant commercial properties amid low interest rates in anticipation of an eventual market recovery.
Commercial investors have shown particular interest in multi-family housing and industrial properties, which have consistently shown profitability throughout continued closures, compared to once-wanted office buildings that have been vacant.
Investments in industrials and apartments kept the market alive until April 2022 after the Federal Reserve decided to start raising interest rates in March in a bid to combat rising inflation, after two years of cheap stimulus cash that drove potential buyers out of the market and caused a major drop in sales.
“One is the remote work situation. I actually think it will be permanent,” Joel Marcus, founder of Alexandria Real Estate Equities, told FOX Business’ Maria Bartiromo on June 8.
“The other big shock is the recessionary pressures, both in terms of costs and interest rates,” she concluded.
The Fed has raised interest rates 75 basis points so far this year, with a further 50 basis point hike expected next week.
The yield on 10-year Treasury bills, the benchmark for commercial mortgages, has doubled since the central bank’s policy change.
In the first two months of 2022, the 10-year Treasury yield range was 23.7 basis points and 28.1 basis points, respectively, before jumping to 78.5 basis points in March, 54 .0 basis points in April and 37.4 basis points in May.
Rising interest rates are now deterring many banks from lending to buyers for investments that appear potentially too risky, with investors who relied on easy credit rapidly abandoning the property market.
While most investors are pushing ahead with planned purchases, some are trying to pull out of deals still under contract, while others are more cautious about acquiring more properties at this time.
Some potential buyers in smaller industrial and retail sectors who were rushing to buy properties in early spring are now retreating to avoid higher borrowing rates.
Meanwhile, commercial property sales continued to advance, driven by positive consumer spending in April.
However, Philip Nicozisis, Chairman of Nico Properties Group, LLC., believes that it “usually takes a while for rising interest rates to affect the investment market, which has happened in the past. , and I think it will happen again this year”. time.”
The May RCA CPPI report said commercial properties rose 18.4% in April from a year ago.
Sales of multi-family apartments also continue to rise as higher mortgage rates push buyers out of the single-family home market, leading to stronger demand.
Data from the report indicates that industrial prices rose 26% from a year ago in April and apartment prices rose 23%, with industrial and apartment indices up 1.3% from a year ago. compared to March.
The report estimates that the rise in prices from March to April suggests an annualized growth rate of around 17%, which is “slower than the annual rate of change displayed for these indices”.
However, even these sectors are beginning to feel pressure from higher interest rates, as the threat of an economic slowdown or recession towards the end of the year leads to a pessimistic outlook.
Nicozisis remains positive noting that “industrial and small retail is still strong as we still have real estate shortages due to the pandemic and even housing is scarce.”
He said that “capital markets and investment sales continue to be robust due to the scarcity of products, and that “there have also been mergers with some real estate investment trusts (or REITs) in more interest rate hikes, which means investors are accepting a new normal, which means fewer returns.
A rapid decline in commercial real estate investment due to rising interest rates will lead to lower purchase prices in the long term, as higher rates reduce the number of willing buyers, forcing landlords to make concessions to buyers if the market dries up.
This could open a window of opportunity for wealthier real estate investors with extra capital looking for better deals.
“I think investors and sellers are just going to say no, because there’s a little waiting period before prices go down,” Nicozisis said.
“There’s a bit of a shock with interest rates rising so quickly, so prices are going to have to come down, but it’s probably going to be a year or so before reality sets in with sellers,” he said. said, concluding that “people are just going to have a wait-and-see approach.