CRE Pricing Remains Above Pre-Pandemic Levels

Real estate funds appear to be staying the course and factoring in a slight overall cooling of the market, according to the Real Estate and Construction Industry Outlook by RSM US issued this week.

Fundraising is taking on the same mindset, as the volume of sales transactions and related cap rates achieved in those transactions have both eased, it said.

Investors are currently on their back foot, reevaluating valuations and strategies as interest rate hikes and inflationary pressures point to a potential looming recession. Capital is pointed to less-risky plays, value-add and core and core-plus assets, RSM real estate senior analysts Lauren Gerdes and Sarah McKevitt said.

“Real estate investment may be slowing from its unprecedented pace in 2021, but it is still seeing prices well exceeding pre-pandemic levels, and plenty of capital is available for investors to keep spending.”

Financing Relatively Cheap

RSM said that cash flow from properties, particularly multifamily and industrial, remains strong and financing is relatively cheap.

“We anticipate transaction volume to pick up in the fourth quarter of 2022 or early 2023 as fund managers reevaluate strategies and their investors’ expectations for returns, looking to deploy capital that remains on the sidelines,” it said.

Cap Rate Compression Across the Board

Even the pandemic “darlings” multifamily and industrial experienced cap rate compression.

Multifamily cap rates have declined by 0.79% since the second quarter of 2020, compared to an average decline of 0.15% in the three years prior, according to CoStar.

RSM said it’s been more difficult for deals to achieve investment goals because of rising valuations.