National Cap Rates & Investment Insights
As we move into the second quarter of the year, the process of recalibrating and rebalancing across all facets of the commercial real estate capital markets has encountered a frustrating pause. This is largely due to heightened financial market volatility and uncertainty, compounded by the collapse of Silvergate, SVB, and Signature Bank in the US, which sounded alarm bells about the consequences of sharply rising interest rates on the underlying value of and exposure to various bank assets. Yield curves remain historically inverted, and liquidity conditions in financial markets have noticeably tightened.
While these bumps in the road are to be expected as central banks navigate a difficult course, there is no easy or fast way out. All of this takes time to flow through the economy and the markets. Just as central banks can’t hasten their monetary policy influence on inflation, commercial real estate capital markets participants cannot hasten the process of price discovery between buyers and sellers because caution, conservatism, selectiveness, and flight-to-quality abounds.
Currently, the commercial real estate industry is facing a confluence of two dynamics: an oncoming potential macroeconomic slowdown, as well as the required adjustment to a normalizing, rising interest rate environment. The former is expected to soften fundamentals across the board, although it will not derail commercial real estate performance prospects altogether, as most commercial real estate sectors are well-positioned to bounce back relatively quickly.
Last quarter reinforced the importance of focusing more closely on the bigger picture, rather than allowing the whipsaw of market sentiment to take one’s own sentiment along for a tumultuous ride. The focus on structural demand drivers, defensive strategies, and on credit, income, and asset quality remains a key theme throughout the commercial real estate investment landscape.
While there are certainly a few pockets of isolated weakness throughout commercial real estate (particularly as it relates to commodity and lower-quality office product), institutional, foreign, and private buyers remain focused on the abundance of thematic investment plays, whether that be acquisition or development-oriented strategies throughout the multifamily, industrial, retail, hotel, high-quality office, seniors housing, and alternative/niche sectors – all of which offer attractive risk-adjusted returns even in a higher-rate environment.
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Attached below is the source for the information in this update:
DISCLAIMER: This information is for educational and informational purposes only and should not be considered as investment advice. Any investment decision should be made based on your own research and analysis. You should consult with a financial advisor or other professional to determine what may be best for your individual needs and risk tolerance. We encourage you to do your own research before making any investment decisions. Investing involves risks, including possible loss of principal.