At year-end 2022 the Fed is in the middle of their most aggressive financial tightening since 2008, in a desperate attempt to halt rising inflation brought about by huge government deficit spending and supply chain effects from the pandemic and Russia’s war on Ukraine. The Fed’s ongoing quarterly interest rate increases have led to the dreaded “inverted yield curve”, a historical harbinger of a pending recession. This in turn has brought the relatively robust commercial real estate activity of the first three-quarters of 2022 to an abrupt halt here in the fourth quarter.
We now see a growing chasm between seller and buyer pricing expectations; and with realty setting in that the market has indeed changed, price recalibration is beginning to occur. Dwindling investor demand is leading to leveling or declining pricing as cap rates begin to inch higher and the spread with the 10-year treasury tightens. Such a market tends to drive many investors to the sidelines or to seek primarily higher quality assets with established and enduring cashflows.
The news is not all bad however. There is a huge amount of patient capital available for deals that make sense, and fresh opportunities are emerging. By way of example, retail properties are emerging as the new industry darling due to consumers rediscovering the post-pandemic joy and physical and emotional fulfillment of in-person shopping.