CRE investment slows amid rising rates

Multifamily and industrial remain outliers as other sectors falter

CRE investment slows amid rising rates

Given increased interest rates and the potential for a recession, investment in commercial real estate is expected to slow in 2023, according to a newly released study.

Released this week, the CBRE 2023 US Investor Intentions Survey found that “…rising interest rates, a looming recession and less credit availability will weigh on investment activity in 2023.” Moreover, the study found that nearly 60% of respondents expect to purchase less real estate this year, while 15% of “investors are hesitant to sell assets as market pricing falls,” the survey’s authors wrote. “Sixty per cent (60%) say they will either sell less or not sell at all, while only 27% expect to sell the same amount as last year.”

The most sought-after sectors in commercial real estate

The most sought-after sectors remain multifamily – particularly apartment complexes – and industrial, led by modern logistics facilities in major markets, according to the study. Grocery-anchored centers are the most popular subsector for retail investors, while office investors largely prefer Class A assets in prime locations, the study found.

“While sector preferences are largely unchanged from last year, more investors are adopting opportunistic and distressed strategies to take advantage of market conditions,” the study reads. “Most expect price discounts of up to 30% across sectors, with shopping malls and value-add office assets expected to offer the greatest. Despite changes in strategy and pricing, almost 70% of respondents expect no change in fund allocations to real estate from last year.”

Where the high-performing markets are in CRE

Investors continue to prefer high-performing Sun Belt markets, led by the Texas markets of  Dallas/Fort Worth and Austin, along with Miami, Los Angeles and Nashville, the study found.

Adoption of ESG (environmental, social and corporate governance) standards will likely continue, researchers found. More than 80% of respondents do not think that deteriorating economic conditions will affect their adoption of ESG criteria altogether. Nevertheless, about half of respondents think the current environment will limit the extent to which ESG criteria are considered in their investment decisions, according to the study.

The bottom line, according to the study: “Concerns over rising interest rates, tighter financial conditions and a looming recession are negatively impacting investor sentiment. This will weigh on commercial real estate investment activity, particularly in the first half of 2023. CBRE forecasts that 2023 investment volume will be down by 15% from last year. As interest rates and economic conditions stabilize in the second half of 2023, we expect investment activity will increase.”

CRE industry veteran weighs in

Mortgage Professional America reached out to Joseph Rubin of Miami-based EisnerAmper – one of the nation’s largest accounting, tax and business advisory firms – for additional insight. He reached out to MPA while at the CRE Financial Council in Miami, where “…everyone is trying to assess whether the markets will improve this year,” he relayed back.

“It is hard to imagine that the transaction market can improve without more clarity on interest rates and values,” he told MPA. “It’s a vicious cycle: the bid and ask spreads remain wide so assets can’t sell, and without sales to create data points you can’t price new deals. Similarly, on the lending side, because of value uncertainty loan proceeds are down which reduces the leveraged yield on acquisitions.”

The mercurial nature of interest rates being tinkered by the Fed in efforts to stave off inflation is expected to continue, Rubin said: “The first thing we need to understand before the market starts to come back is clarity on where interest rates will be at the end of this transition period. That is unlikely to happen in the next few months.”

Rubin agreed with the CBRE study that the CRE market may begin to normalize by the second half of 2023: “So the real estate market remains filled with uncertainty,” he said. “There is hope at the conference that by the second half we will have enough clarity to move more capital. Everyone is ready to invest and to lend. They just need to be able to better measure the risk.”

Other key findings of the CBRE study include:

  1. More investors will implement opportunistic and debt strategies than last year because of attractive returns amid higher interest rates and tighter financial market conditions.
  2. While investors remain committed to ESG, nearly half of respondents say that the worsening economic outlook will limit the extent to which they consider ESG criteria in their investment decisions.