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U.S. Market Q3 2022: Trends and outlook for Multifamily, Office, Industrials, Retail and Hotels

Stubborn inflation, geopolitical concerns, a strong U.S. dollar, and fear of a recession have spooked the markets, despite tremendous amounts of uninvested capital.

U.S. Market Q3 2022: Trends and outlook for Multifamily, Office, Industrials, Retail and Hotels
Dealmakers are seeing transactions fall out more frequently because, with higher borrowing costs, record-low cap rates are unsustainable.

The commercial real estate market is amid a massive slowdown, and what market participants have been feeling for months is now reflected in transactional data. Colliers in a recent report titled U.S. Market Snapshot Q3 2022 notes that sales are down compared to last year and Q2 of this year, and there is little to suggest rapid market liquidity is coming.

The future outlook may still not be as gloomy as it has been so far. The report says that interest rates rose rapidly in Q3, as the Federal Reserve is in a hawkish state to tame entrenched inflation. However, with October’s core CPI reading coming in below consensus, expectations for continued Fed action on the overnight borrowing rate are shifting. In turn, this may loosen liquidity in the quarters ahead.

The factors leading up to the current state of US real estate market, as identified by the report, are stubborn inflation, geopolitical concerns, a strong U.S. dollar, and fear of a recession that have the market spooked, despite tremendous amounts of uninvested capital.

Also Read: Emerging trends in the European market for real estate investors

U.S. Market Snapshot captures trends and outlook for various segments such as Multifamily, Office, Industrials, Retail and Hotels.

Multifamily remains a relative bright spot, with Q3 volume stronger than any period outside of 2021 and the first half of 2022. However, fundamentals are starting to show signs of softening. Occupancies have been at record highs, so some form of reversion to the mean was not unexpected.

Also Read: Dow 30 jumps 20% from September lows leaving Nasdaq 100 and S&P 500 behind

Dealmakers are seeing transactions fall out more frequently because, with higher borrowing costs, record-low cap rates are unsustainable. Rising insurance costs in some markets, particularly in Florida, are also stressing transactions, causing repricing and retrades, if not buyers outright walking from deals.

Elevated inflation is forcing higher operating costs and squeezing cash flows. Of all asset classes, multifamily has the lowest going in cap rates. Based on transactional cap rates, this asset class ended Q3 about 70 basis points above 10-year Treasuries and a negative 140 basis points below BBB bonds.

This means cap rates need to rise, and many sellers are holding onto assets. Despite fundamentals softening slightly, multifamily has several tailwinds. These include high single-family mortgage rates, pushing 7% at the end of Q3, and high single-family home prices, keeping renters in place and out of homeownership.

Office is out of favor. Sales volume declined each quarter of the year, and Q3 sales volume is well below the 2014-19 average. Buyers today are very selective, while owners of the most in-demand product, trophy Class A properties, are holding.

Industrial offers substantial rent upside, so deals are still trading. However, as with other asset classes, higher borrowing costs and low cap rates are causing deal volume to dry up.

Retail investment sales volume continues its trend of volatility. Given the recent upheaval in the retail landscape, it is hard to pinpoint a “normal” for this asset class. Regardless, Q3 volume fell, as it did across other sectors.

As with other asset classes, hotel volume is falling, and sales activity has slowed in three consecutive quarters. Cap rates are the highest of any major property type, so rising interest rates, on the surface, are not as impactful. However, investing is a relative game, and deals are also repricing in this sector.

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First published on: 06-12-2022 at 04:02:41 pm