The Dynamics of Deals are Changing

The marker is digesting a rapid change in the market with a thinning buyer pool amid rising rates, said Dianne Crocker, a principal analyst at LightBox at this year’s national Women of Influence conference.

PARK CITY, UT—“This is a big week for economic news and more than 50% of people think we are already in a recession.” So said morning speaker Dianne Crocker, a principal analyst at LightBox. Once upon a time, she said, our transaction volume was breaking records every quarter.

“Forecasters were predicting that 2022 would be almost as good as 2021,” she said. “What a difference the past six months have made. All of those predictions really became obsolete.”

We are now really in unchartered waters here and the dynamics of deals are really changing, Crocker said. “Inflation is really the primary concern in our economy right now and things are really triggered by supply chain disruptions during the pandemic, exacerbated by the war in Ukraine.”

This year’s third annual Women of Influence conference was held at the Stein Eriksen Lodge Deer Valley in Park City, Utah and the event brought together more than 300 of the most influential women in real estate from 35 states around the country. According to Crocker, who opened as keynote of the event, the Fed is moving more aggressively than it might otherwise have given growing inflationary pressures.

In June, she explained, the CPI increased by 9.1% YonY, the highest in roughly four decades. “Now the gamblers are out there predicting the odds that we will go into a recession.”

Higher cost of capital is pressuring lender underwriting, she explained. “There are tighter standards for spec deals, there is more scrutiny in underwriting with a focus on costs and pricing and there are more requirements by borrowers to put more cash into deals.”

She also pointed out that there are also fewer bids on loans that previously placed easily. So what is happening in the CRE environment/? She says that the investment climate shows signs of cooling. “Deal activity weighted to larger deals more suitable for institutional buyer with equity to deploy,” she said. “The thinning of buyer pool is evident as higher rates impact access to debt capital.”

April was the first month in 13 months that we saw a decline in property transactions,” she explained. “We could not sustain where we were last year. Lines are now being redrawn on 202 forecasts.” She also pointed out that MBA has downgraded its lending forecast multiple times since April. “They project a much slower second half of the year, with total commercial and multifamily financing to fall by 18%.”

Drilling down into sectors, she said that industrial and multifamily, the bells of the ball in this recovery period, are still somewhat sitting pretty and chugging along. “Industrial is still desired,” she said. “Companies are still increasing product inventories to avoid supply chain disruptions, last-mile is most desirable.”

She pointed out that the outlook for industrial is that there will be continued strength with some headwinds—for example, she pointed to Amazon’s plans to put 10 million square feet of warehouse space up for sublease.

For multifamily, she said that the demand will remain high as home ownership costs rise. “Home prices rose 20% in April, along with higher borrowing costs, putting ownership out of the hands of new buyers. Driven by huge population base coming into the renter market, coupled with housing shortage especially in new migration markets. National rents are up about 17% in the last 12 months,” she said.

What office and retail have in common is that they are laggards and their stories are still unfolding and investors don’t like uncertainty, she explained.

“For office, employers are reimagining office space as new lease agreements are inked, best amenities are winning strategy in talent war. If a company can present themselves as the next Google, they are really going to have a leg up.”

For retail, owners are adjusting to new consumer behaviors and preferences. “A recession would put continued stress on retailers. The malls of the 90s are really obsolete now… Everyone wants open spaces, restaurants with cool vibes and experiential shopping. It is really a mixed bag in retail.”

There are also a lot of geographic trends going on right now, she said. “Due diligence is an early indicator of where investors are focused. There is continued strength and interest by investors in smaller secondary metros. Six of the top 10 are smaller metros. NYC and Northern New Jersey are also rebounding post-pandemic.”

According to Crocker, we are entering a new time in real estate. “The best you can do is do your research and increase your caution,” she said. “Expect near-term choppiness.”

Before today’s coverage even began, attendees participated in just a few of the many networking opportunities planned here at the event. Below is a shot of the morning mindfulness yoga, and, later today, attendees will participate in other leisure activities including a sip and paint, mountain meditation and a Manhattan cocktail class.

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