While the calendar has flipped to a new year, many of the same challenges that brought the commercial real estate (CRE) bull market to a halt in the second half of last year remain in full force to start 2023. The Fed’s determination to bring inflation to its 2% target at any cost has forced financing rates higher while also causing the economic outlook to deteriorate, representing a one-two punch for CRE property owners. Buyers and sellers remain far apart on price expectations, meaning sales volumes are likely to begin the year slow out of the gates. Healthy and functioning debt markets are a key bright spot in the market and should help the CRE market avoid a prolonged, painful downturn, but the reality remains that valuations on many properties are inconsistent with the new reality.
- Sales volumes have declined significantly, and property prices are beginning to correct lower in response.
- Debt markets are healthy and functioning, which should help avoid a deeper downturn.
- Sector and regional dispersion remain historically wide, a fact that will become more relevant for investors as the overall backdrop becomes less benign.