I love predictions, especially from industry experts. A few of these are bold. If you do not have time to read the entire article, allow me to extract and apply the relevant.
"Cap rates for apartment and industrial properties will increase significantly
Cap rates for the two hottest CRE sectors during the last five years will increase substantially from 3.0%-4.0% to 5.5% to 6.5%+"
If cash buyers disappear, cap rates will jump. However, I continue to hear about all the money on the sidelines.
"The bid-ask spread for CRE property sales will begin to narrow
The bid-ask spread for CRE acquisitions is currently wider than the Grand Canyon, with sellers seeking cap rates of 4.0% to 6.0% and buyers offering cap rates of 6.0% to 7.0%+. However, the bid-ask spread will narrow significantly as sellers become more realistic regarding property values. This will lead to more transaction activity in 2023."
I hope so, transaction volume stinks right now.
"There will be a sizable increase in CRE defaults and foreclosures
There are many properties that are overleveraged and with a slowing economy, will see substantial vacancy increases that will lead to higher foreclosures and defaults. Investors should begin raising capital for distressed and workout funds. "
I think there are fewer overleveraged properties than prior cycles. I see it more on the construction and bridge side. Perm debt has been relatively conservative and benefited from lower debt costs. Still, there will be opportunities and many of our clients are cashing-out equity from existing properties via reasonably conservative 3-5 year loans and are ready to pounce.
"Industrial rents will decline more than 10%
The booming industrial market where cap rates compressed to below 4.0% and average asking rents increased about 50% over the last seven years will see rent levels declining over 10%. Higher interest rates and inflation has curtailed the purchase of goods by consumers and the development of over 700 million square feet of new space will soften rents nationally."
This predictions was before the December manufacturing numbers, which came out today and reflect another month of decline. If less product is being built and supply chains are more efficient, fewer warehouses will be be needed to store and distribute. All things considered though, a 10% decline after a substantial increase may not be detrimental. Unless, you are betting on future rent growth.
Contributed by Kyle Nagy, President
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