Today ’ s CRE Market Dynamics : Projections for Real Estate Valuations :
Cap Rates Forecast
CAPITAL MARKETS
Today ’ s CRE Market Dynamics : Projections for Real Estate Valuations :
Interest Rate Environment : - The Federal Reserve ’ s monetary policy has been pivotal to the CRE market ’ s performance over the past two years .
- To put it into perspective , 2023 saw a recordlow transaction volume at $ 244 billion which was significantly down from surges into 2021 and 2022 at $ 589 billion and $ 530 billion , respectively .
Inflation :
- As the main driver behind the rise in interest rates , inflation is widely impacting current investments and future investment opportunities .
- While nominal interest rates ( not adjusted for inflation ) have an impact on real estate values , they do not have the same effect on cap rates as real interest rates do ( adjusted for inflation ).
Cap Rate Trends : - Cap rates are not measured in real time , they are periodically set via appraisals or transaction data which lags private market values for other real assets .
- It is often assumed cap rates move in tandem with interest rates ( rising interest rates lead to higher cap rates which in turn lowers property values ) which is true , however the relationship is not linear as it is influenced by a variety of other factors including broader macroeconomic performance , investor risk appetites , as well as fundamental supply and demand .
Real Estate Equity :
- Well-capitalized investors have an advantage and might find strategic opportunities in undervalued assets . With many CRE loans maturing in 2024 , there could be a chance to acquire properties at discounted prices .
Private Credit :
- The current environment remains favorable for real estate private credit . Elevated interest rates present the opportunity for locking in attractive yields with the expectation of eventual rate cuts to further enhance their appeal .
Cap Rate Adjustments :
- Elevated cap rates and the potential for interest rate cuts in the near-to-medium term sets the stage for the beginning of cap rate compression in 2025 .
Land Values :
- As interest rates slowly creep back down , we are likely going to see a recovery in commercial and industrial land values as new development will start to pencil unlike the past 18 months . We expect to continue to see a premium for shovelready residential dirt for the foreseeable future .
Cap Rates Forecast
Source : CFA Institute , Statista Coldwell Banker Commercial Land Team 2024 Riverside County Market Report | 5