In the wake of the Federal Reserve's aggressive interest rate hikes, the commercial real estate landscape finds itself at a pivotal juncture. With borrowing costs climbing, investors and developers face increased financial scrutiny and tighter lending conditions. These higher rates translate to higher capitalization rates, that has dampened investor appetite for commercial properties.
Over the next six months, we anticipate a continued deceleration in commercial real estate sales velocity as market participants adjust to the new interest rate environment and await stabilization or rate cuts. The heightened cost of financing has prompted many investors to adopt a more cautious approach, delaying or scaling back investment decisions.
Moreover, new supply has been very limited as rising interest rates impact the viability of development projects, particularly those reliant on financing for construction. Developers facing higher borrowing costs and reduced profitability, have had to be very selective on new project commencements.
However, amidst these challenges, most sectors of the commercial real estate market have remained resilient. Properties with stable cash flows have attracted some investor interest despite the higher cost of capital. But the velocity has been moderated by Buyers and Sellers looking for “price Discovery” – where is the middle ground for the new normal rates.
In summary, the current high interest rate environment presents challenges for the commercial real estate sector, potentially tempering sales velocity over the coming months as investors recalibrate their strategies in response to changing market conditions.