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Baker Tilly Commercial Real Estate Market Report
Last quarter, we anticipated that the tenuous economic situation would not be resolved quickly. We noted in the quarter that certain trends persisted from the end of the year, with transaction activity decelerating even further and indications of inflation beginning to ease. Energy remains the primary source of deflationary pressure, but the easing of inflation was more broadly based in the first quarter, providing some confidence that the trend is meaningful and sustainable. The biggest economic headlines this quarter were related to bank distress with the publicized failures of Silicon Valley Bank and Signature Bank, sparking concerns of broader issues. For commercial real estate, the last quarter was most remarkable for its lack of activity. The multifamily and industrial sectors, which continued to transact even when other asset classes were subdued, finally slowed significantly. In addition to inactivity, the increase in distress and default in the office sector was notable, if not unexpected. We expect that transaction activity in the second quarter will remain muted with no economic influences serving to narrow the bid-ask spread that has developed between buyers and sellers.
For some time now, pundits and market commentators have been talking about how the United States is heading for or may have already been in a recession, however the first quarter still posted GDP growth of 1.1%. This tepid growth rate represents a decline from prior quarters, perhaps presaging the widely expected recession could finally arrive in 2023. The mix of positive and negative indicators is proof that the economy is disjointed. Coming out of the pandemic, the term
"new normal" was thrown around a lot. In reality, society and the economy aren't finished processing and evolving based on shifts that were likely not created by the pandemic but in many cases accelerated by it. This was coupled with a strong overreaction at the federal level that pumped cash into the economy when all these factors are still being worked through in what is proving to be a messy and unprecedented process. Beyond the U.S., other countries are going through similar processes, and Russia's war on Ukraine adds a disjunctive element. If there is such a thing as a "new normal," we think it is safe to say we are not there yet.
We are optimistic that inflation will continue to improve, paving the way for
a compression of interest rates, but the environment is highly uncertain. We anticipate the second quarter will be defined by increased distress and how those issues are resolved.
As always, thank you for reading.
By Brent Maier, National Real Estate Valuation & Advisory Leader, Baker Tilly US, LLP
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