2022 Review and 2023 Outlook

Zachary Urow February 1, 2023

2022 Review and 2023 Outlook

2022 REVIEW

Although commercial real estate transaction volume in 2022 was the second highest on record, it decreased by double digits in the latter half of the year compared to 2021’s transaction volume. 2021 had the highest transaction volume on record driven by record low interest rates. 2022’s transaction volume decreased in the latter half of the year because the Federal Reserve increased the federal fund rate 7 times. The last rate hike was in December of 2022 from 3.75% to 4.00% to 4.25% to 4.50%. The Federal Reserve’s goal is to raise rates in order to tackle the 40-year high in inflation. The sudden increase in interest rates resulted in lenders charging buyers more for their loans. Buyers responded by reducing their offer prices, increasing cap rates, and slowing their pro forma rental rate growth. The biggest transaction volume declines have been for Certificate of Occupancy deals and lease-up deals. Sellers are still in the 2021 and early 2022 mindset that buyers are willing to pay record prices and to assume significant risk. The gap between buyer and seller price expectations shows why deals are not trading in volume.

2023 OUTLOOK

We expect that 2023’s transaction volume will be less than 2021’s and 2022’s transaction volume. The delta will be driven by how much interest rates change throughout the year. The Federal Reserve is scheduled to meet in February 2023. Market experts believe that rates will increase incrementally by .25% or .50% because inflation declined from 9.1% in June 2022 to 6.5% as of December 2022. The Federal Reserve’s target inflation rate is 2%, so there will most likely be multiple small rate increases throughout 2023 to put more downward pressure on inflation. In the interim, buyers will target yield producing deals and develop their own properties now that construction costs decreased from their highs during COVID-19. Buyers have a historic amount of dry powder ready to opportunistically deploy into real estate. Their challenge is finding deals that meet their underwriting requirements. Please contact Zachary Urow at zachary@urowrealestate.com or https://www.linkedin.com/in/zacharyurow/ for questions on how buyers would value your real estate.