A Mid-Year Reflection on U.S. Capital Markets Trends
Industry experts predicted a strong year for commercial real estate investment and lending, but volatile market conditions will likely slow down activity in the coming months.
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Driven by strong investor interest and availability of capital, commercial real estate investment activity recorded a powerful comeback in 2021, as pandemic-fueled anxieties began to dissipate. Thanks to high liquidity in the market, lending activity also continued to rise, with alternative lenders, such as debt funds and mortgage REITs leading the market at the end of last year, according to CBRE research.
At the beginning of 2022, CBRE projected that high capital availability would continue to support a resilient acquisition market during this year, with the total investment volume forecasted to increase 5% to 10% over 2021 levels, on track to reach pre-pandemic levels in 2019.
U.S. Capital Markets Projections Held Strong in the First Quarter of 2022
While uncertainties began to rise again due to high inflation and the war in Ukraine, commercial real estate investment in the U.S. amounted to $150 billion in the first quarter of 2022, up 45% on a year-over-year basis, CBRE revealed. Multifamily saw the highest influx of capital with $57 billion in assets traded in the first quarter.
Commercial real estate lending volume was also up in the first quarter of the year, despite market volatility and tightening conditions. The CBRE Lending Momentum Index increased by 5.5% quarter-over-quarter and 69% on an annual basis.
Thanks to an increased appetite for bridge loans, alternative lenders continued to lead the market in the first quarter. Despite worsening economic conditions, collateralized loan obligation issuance hit $15.2 billion, underscoring liquidity in the bridge lending market, while CMBS issuance reached $20.8 billion in the first quarter across the industry, CBRE reported.
Interest Rate Hikes Curb Market Growth
Although investors and lenders remained mainly confident in the first half of 2022, the recent interest rate hikes will inevitably result in reduced liquidity in the market. As inflation continued to rise, reaching 8.6% year-over-year in May, the Federal Reserve decided to increase rates by a whopping 75 basis points, marking the largest single shift in interest rates since 1994. In an attempt to curb inflation the interest rate is expected to rise to 3.4% by the end of the year, the Commercial Observer reported.
Will the Multifamily Market Withstand Current Economic Pressures?
Industry experts expect the multifamily and industrial sectors to be less severely impacted by the rate hike, as rents kept pace with inflation across the country. Nonetheless, there’s still a rising concern over the higher cost of debt capital, tighter underwriting, and buyers pulling out of deals, according to Multi-Housing News. At the same time, sellers who don’t want to trade at a lower price are also taking their properties off the market.
Real estate players also predict that stabilized properties will continue to trade, however, whether deals materialize will depend on the investors’ strategies. Transitional assets, those with value-add opportunities could also withstand market volatility if investment strategies are executed right, MHN noted. Overall, both investors and lenders will likely flock toward multifamily assets during this uncertain period in search of stability, as other asset classes, such as office, retail or hotels are still highly unpredictable in terms of demand.
Related Questions
What are the most significant trends in U.S. capital markets for commercial real estate in 2020?
The most significant trends in U.S. capital markets for commercial real estate in 2020 include a strong demand for investors, a wealth of capital available, and stable cap rates. The pandemic has caused an influx of foreign capital as investors seek affordable precautions against possible depreciation of the U.S. Dollar. Additionally, the government has enacted fiscal and monetary policy changes that have provided a fertile ground for the economy to grow in 2022.
What impact has the COVID-19 pandemic had on commercial real estate financing?
The COVID-19 pandemic has had a massive impact on nearly every sector of the U.S. economy, and commercial real estate is no exception. According to a report by Green Street Advisors, which analyzed the performance of a variety of U.S. REITs (real estate investment trusts), commercial real estate values have dropped an average of 24% across the U.S., with senior housing prices dropping around 49%, hotel prices dropping 36%, and student housing prices dropping 30%.
At the same time, the Fed cut its benchmark interest rate to nearly 0%, while in many cases CRE debt is priced at even less than it was just a few weeks ago. This could be quite an attractive time for cash-rich investors to purchase commercial real estate.
However, lenders (which are still actively doing business at the moment) may be spooked if values fall much further. For all types of commercial properties, a certain number of tenants are likely to fall behind on their rent during this period, making it difficult for borrowers to pay their monthly mortgage payments. This is particularly a concern for retail borrowers, as restaurants, stores and businesses in many major cities have been required to close. This is an even greater concern for asset classes that have already been struggling in recent years, such as B and C-class malls, many of which already face occupancy issues. In addition, with corporate work-from-home measures becoming more commonplace every day, both borrowers and lenders may be concerned about both the short and long-term viability of office properties.
What strategies can small businesses use to access capital during the pandemic?
The pandemic has made it difficult for small businesses to access capital. However, there are still some strategies that small businesses can use to access capital during this time. One option is to apply for a Small Business Administration (SBA) loan. The SBA offers several loan programs, such as the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL), that can help small businesses access capital during the pandemic. Additionally, small businesses can look into alternative financing options, such as venture capital, merchant cash advances, and crowdfunding. Venture capital can be a good option for businesses with potential for growth, while merchant cash advances can be a good option for businesses with poor credit. Crowdfunding can also be a great way to access capital during the pandemic, as it allows businesses to raise money from a large number of people.
What are the most important considerations for small business owners when seeking financing?
The most important considerations for small business owners when seeking financing are the four Cs: capital, credit, collateral, and conditions. Capital refers to the business and personal earnings, savings, and debt of the business owner. Credit is the credit history of the business and/or the business owner. Collateral includes assets that can be used to secure the loan if it is a secured loan. And lastly, conditions refers to the purpose of the loan, time in business, and industry of the business. For more information, please see Small Business Loans Guide: Before You Start and Non-SBA Financing Options for Small Businesses.
What are the advantages and disadvantages of using alternative lenders for small business financing?
The advantages of using alternative lenders for small business financing are that loan approvals typically take less than a few hours and funds are provided in less than a week for smaller loans. Alternative lenders also often have the easiest eligibility requirements and fewer rules for the use of funds. This makes them a great option for startups or business owners without high revenues.
The downside of using alternative or online lenders is that they typically offer the highest interest rates and fees compared to other types of lenders. This is to make up for how quickly you can get approved and funded.
What are the most important factors to consider when evaluating commercial real estate financing options?
When evaluating commercial real estate financing options, the most important factors to consider are interest rates, fees, repayment terms, and the purpose of the loan. Interest rates will determine the cost of borrowing money, while fees can add to the overall cost of the loan. Repayment terms will determine how long you have to pay back the loan and what type of payment schedule you will have. Finally, lenders will want to know the purpose of the loan and will want to see evidence that you have a solid plan in place for how you intend to use the property and generate income from it.
Sources: 5 Tips for Shopping for a Commercial Real Estate Loan and What You Need to Know Before Applying for a Commercial Real Estate Loan