An Update on the Local Real Estate Market
Interest Rates Pose Greatest Challenge in 2023, Survey Says
The overwhelming majority of investment sales and leasing brokers as well as developers, owners and managers doing business in the Midwest indicate that interest rates will have the single biggest impact on the commercial real estate industry in 2023. That’s one of the take-aways from the 12th annual forecast survey conducted by Hartland Real Estate Business.
The survey was conducted via email in November and December.
Nearly 62 percent of brokers and 80 percent of developers, owners and managers surveyed expect interest rates to increase during the next 12 months.
“Rising interest rate environments always present a challenged to commercial real estate, especially after a period of prolonged low rates.” Said Charles Margosian III, managing principal with Lombard, Illinois-Based Highland Management Associates Inc. “It remains to be seen what impact the rapid increase in rates will have on commercial real estate valuations, be we are betting on meaningful declines in valuations across asset types.”
In mid-December, the Federal Reserve raised its benchmark federal funds rate 50 basis points to a range of 4.25 to 4.5 percent. The Fed now has rattled off seven rate hikes for an aggregate increase of 435 basis points over the last eight months. The Fed also indicated that rate hikes would like continue through 2023 in an effort to combat inflation.
Brokers Predict Lower Sales
Most participants in this year’s broker survey specialize in either the office, retail or industrial sectors. Nearly 49 percent of the brokers anticipate that their firm’s total transaction volume by dollar amount (leasing and investment sales combined) will be lower in 2023 than it was in 2022. Thirty-four percent expect transaction volume to be approximately the same, while seventeen percent expect it to be higher.
Among respondents who expect their firm’s annual transaction volume to be lower in 2023 than in 2022, 26 percent expect a drop in business of 5-10 percent, 26 percent expect a decrease of 11-15 percent, and another 26 percent anticipate a drop of more than 20 percent.
Adam Haefner, a principal with Avision Young in Chicago, wrote that this is opportunity for buyers with cash to pick up discounted properties from sellers that face refinancing challenges. On the flip side, the challenge will be getting sellers to accept the speed at which values have dropped.
Brokers most frequently cite industrial and multifamily (63 percent each) as the property types that they expect to experience a high velocity of sales activity in 2023. The majority of brokers (77 percent) identify the office sector as the property type they expect to experience a low velocity of sales, followed by retail at 38 percent.
“The greatest opportunity is the continued expansion of the industrial sector, both in continued growth of warehouse and e-commerce space and [onshoring],” wrote Jim Barry, president of the Milwaukee-based Barry Co. “The greatest challenge is the anemic absorption of office space with no improvement on the horizon.”
Brokers were also asked which property sector(s) will experience the greatest increase in valuations over the next 12 months. Respondents most frequently cite industrial (50 percent) followed by multifamilt (19 percent), hotel (16 percent), retail (16 percent) and office (9 percent).
When asked to provide their best guess to where the 10-year Treasury yield will stand at the end of 2023, brokers most frequently predict 4 or 4.5 percent. Nearly 22 percent indicate that the 10-year Treasury yield could end up at 5 percent or higher.
The majority of participants (54 percent) expect that high inflation will have “Some negative impact” on commercial real estate industry over the next 12-18 months. Nearly 35 percent indicate the high inflation will have a “significant negative impact.” A little over 6 percent expect “some positive impact” and 4 percent say they are uncertain.
By Kristin Hiller, Heartland Real Estate Business
