Opinion-A Challenging Time for Investment Sales

Story by LMT Commercial Realty / September 8, 2022

by Joe Latina, Managing Partner

August 31, 2022

It seems to us that Jerome Powell and the Federal Open Market Committee are hell bent on taking the heat out of all the property markets in the U.S., both residential and commercial, and their methods are reminiscent of one of the greatest lines of the 20th Century when one pundit said to describe hardball negotiating tactics: “First, we’ll get them to their knees; then we’ll cut the oxygen off.”

Well, there is less-and-less oxygen to go around with investment sales these days – thanks to the Fed’s back-to-back 75-basis point increases to the Federal Funds Rate in June and July, and another round of similar magnitude expected in September. As a result, deals are getting renegotiated, delayed, killed and we’ve even seen some 1031 sellers not going into a subsequent trade and just pay the capital gains taxes, which is almost unheard of.

With commercial mortgages currently averaging in the mid-5s and in some cases the lower 6s, leverage is changing with investment sales and making them harder to pencil at most of the asking prices. To make a deal, sellers may have to lower prices and even if they do, investment margins are tighter for buyers. The difference between Cap Rates and borrowing rates is much narrower.

If anything, the mild havoc with investment sales happening now is likely to worsen as we move into 2023. The Fed is widely expected to keep raising the Fed Funds Rate from its current range of 2.25% to 2.50% to 3.75% next year, with some analysts and economists thinking the rate could reach 4%, and the most pessimistic inflation-watchers thinking it could exceed 5%. Regardless of which forecast becomes true, it’s easy to foresee commercial paper trading in the 7% range, and even more.

After a decade+ of ultra-low interest rates, returning to historic norms for borrowers is like breaking up – it’s going to be hard to do.

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