CRE Pricing Forecast Is Down, Down, Down

To summarize Colliers’ Q3 capital markets snapshot is done by looking at one graphic. Their quarterly pricing forecast for office, industrial, multifamily, retail, and hospital is down, down, down, down, and down.

The company explained the overall results through a number of factors:

Although GDP growth in Q3 was an annualized 5.2% on revision, which should have sparked sales activity, transactions were down 50% year over year. Blame that on higher financing expenses and rising cap rates.

For the first time in years, CRE has competition for investment dollars. Risk-free rates like yields on Treasurys had been up significantly (though have been falling as of late, talking about uncertainty). Putting cash into a certificate of deposit for 5% is appealing. If you have capital, sit on the sidelines, collect your interest, and wait until markets have settled some. While watching cap rates rise as a result.

“This money’s geared toward the part of the market that needs it: value-add, opportunistic, and debt strategies,” they wrote. “Investors with the flexibility to play throughout the capital stack stand to benefit from the current market environment. Generational investment opportunities are expected to present themselves to those willing to make the bet.”

Here are some of the highlights by property type:

Multifamily — Volume in Q3 was down $30.1 billion with a -12.8% price change. Pre-pandemic, the category represented about 32% of volume. It’s unlikely to return to that level. Deals in the market are seeing cap rates nearing 6%. But home prices are still high, 30-year mortgage rates are in the 7s. It’s the least affordably time to own, so rentals have strength. Watch 30-year mortgage rates, development concentration, and assumable debt.

Office — Office-using employment is at all-time highs, but “debt maturities, slumping occupancies, and continued ambiguity with future office needs have most investors on the sidelines.” Falling occupancies reduce cash flow, pressuring values. Watch for loan sales, short sales, foreclosures, portfolio rebalancing, and continued interest in life sciences.

Industrial — What had been a market mainstay still has strength, just not turbocharging. Vacancies are rising as supply chains heal. Rent growth is slowing but still strong nationally, giving a potential option of buying a property, offering under-market rents in the short term, and raising them over time. Watch manufacturing rebound, port volume, and supply-side pressure.

Retail — Although out of favor compared to multifamily and industrial, it’s picking up attention from higher going-in cap rates and strong fundamentals. Retailers who survived the last 15 years have become stronger candidates. Watch job growth, union strikes, and the holiday sales season.

Hospitality — With higher travel, consumer spending, and job growth, hospitality should be faring better than it is. A high portion of loan maturities, capital needs for refreshing, tight labor market, and growing insurance expenses are headwinds. Watch new major hotel brands, mergers and acquisitions, and consumer spending.