The commercial real estate (CRE) market finds itself in the midst of a recalibration, as the Fed’s all-encompassing inflation fight has forced market participants to scrap the investing playbook of the recent past. The impacts of sharply higher financing costs are everywhere—sales volumes have come back to earth, property price growth is quickly moderating, and lenders have begun tightening their belts. Critically, the fundamental backdrop for most property types remains solid. Rent growth is bound to slow from its blistering pace, but the resilience of the economy—and especially the labor market—should remain a support in Q4. While this recalibration is uncomfortable, we continue to see opportunities in CRE, especially as traditional asset classes come under significant strain.
- Property valuations are coming under pressure as interest rates move relentlessly higher.
- Transaction volume moderated significantly in Q3 as buyers and sellers search for a new equilibrium and lenders demand more equity in deals.
- Sector and regional dispersion remain historically wide, a fact that will become more relevant for investors as the overall backdrop becomes less benign.