Fed Rate Hikes Dampen CRE Investment Marketplace
Following the surge in Q4 2021 investment sales activity, the 2022 outlook was optimistic at the beginning of the year with the continued reduction in COVID-19 infections, followed by a triumphant return to market normalcy. Moreover, while economic concerns about inflation began to emerge, the Federal Reserve Board allayed investors’ concerns by labeling rising prices “transitory in nature.”
The Fed’s 180-degree turn during 2022 found a newly-adopted hawkish inflation posture that boosted the federal funds rate at a historic record pace from 0.7% to 4.33%. The seven increases to the federal funds rate put the CRE investment market on edge and adversely affected many borrowers’ ability to achieve target yields for their investments. The 30-year average mortgage rate exceeded 7% at the end of October 2022, an increase of nearly 400 basis points in ten months, dramatically slowing real estate investment sales and dampening development activity.
Key Takeaways
- 2022 investment sales volume declined 24.9% when compared to 2021
- Rapid hike in interest rates dampened 2022 investor activity
- Bid-ask spread widened as buyers and sellers disagreed on property values
- Multifamily and industrial remain hot investment commodities
- Investors move to sidelines as recessionary fears create uncertainty
