The Real Estate Capital Institute® notes liquidity is back in the realty capital markets.

  

John Oharenko

Chicago, IL, May 1, 2024 – The Fed holds rates steady at the most recent meeting, noting a lack of progress on inflation.  Meanwhile, rates moved higher by about 30 basis points in April. 

  Despite eleven rate hikes since the end of the pandemic, liquidity is back in the realty capital markets.   Sidelined investors have grown impatient in waiting for commercial real estate prices to drop with increased interest rates. 

 

The absence of higher-quality acquisition opportunities forces investors to reenter the market based on the following realities cautiously:

Changing Benchmark Rate Expectations:   As rising consumer prices and tight employment levels continue to fuel inflation, investors brace for less relief from the Fed for lower rates.  Last month, benchmark rates nearly hit a half-year high, settling at about 4.70%.  As a result, funding sources adopt the "new normal" mortgage rates roughly double those seen a few years earlier.

 

Well-Capitalized Banks:  Unlike previous economic cycles, many banks, including the major money-center institutions, are well-capitalized with ample loan-loss reserves.  As a result, banks maintain more staying power in patiently working out distressed property loans.  Avoiding "panic selling," banks give well-heeled borrowers more latitude to stabilize cash flows to realize better pricing.

 Investment Rating Metrics:  Investors often consider BAA-rated bonds to have risk profiles similar to CRE debt investments.  These bonds are nearly equally priced with comparable CMBS debt, indicating that current [tighter] mortgage spreads align with yield expectations.   Current mortgage spreads range from 120 basis points to about 200 basis points over comparable benchmark treasuries for most types of stabilized properties.

 

Negative Leverage Expectations:  Prime CRE properties (mainly multifamily) often trade at capitalization rates with lower yields than mortgage rates.  However, investors believe more in returns during longer holding periods based on limited new construction and inflation protection expectations. 

 

The Real Estate Capital Institute's® director, John Oharenko, notes, "At the end of the day, the real estate capital markets behave like any other commodity with supply and demand fundamentals favoring a sellers' market.  Adding, "Institutional quality realty assets are always in high demand, based on a very sparse supply."

 

 

The Real Estate Capital Institute® is a volunteer-based research organization that tracks realty rates data for debt and equity yields. 

 

CONTACT

John Oharenko, Executive Director

director@reci.com / www.reci.com

^The   Real Estate Capital Institute^®

Chicago, Illinois USA 60622