Last week we started our series on Getting Unstuck from your current space, and we promise to get back to you with more ideas on how to get more out of every occupancy dollar.
But, we step away from that topic this week to bring you some interesting and potentially good news, which given all that’s going wrong these days, we thought you might appreciate.
As we have been reporting to you for the past several months, a sharp spike in mortgage interest rates on loans for commercial property has spooked property owners and their prospective purchasers. There’s already a long list of major transactions that were scuttled or re-traded during escrow. Institutional buyers have been walking away from 7-figure deposits due to higher borrowing costs and the loss of equity sources.
And, the pullback is across the board. Owner/user demand is also in decline. While good quality properties are still attracting buyer interest, most properties are sitting on the market for months rather than hours or days like they were just a few months ago. Asking-price cuts are becoming more common, as some sellers priced their properties at or above peak levels, which now seem to be in the rearview mirror. The reality of gravity is setting in, at least for those serious about getting their properties sold right away.
All that said, there is some good news on interest rates. As you know, the Fed has been aggressively increasing its benchmark Fed Funds Rate since this past February, sending rates on just about everything else up with it, including the interest rates for commercial property loans. But, this month things went the other way. The US 10-Year Treasury bond yield, which most commercial lenders use as a guide for setting rates, has fallen by roughly 75 basis points in the last month. That sent the SBA 504 mortgage rate down by 33 basis points to 6.11% for December. That is still roughly double the rate quoted this time last year, but we expect the change in direction to have an impact on the psychology of the market, especially if the Fed slows the pace of its rate increases, which is now widely expected.
Can we say that this dip in rates will save the market from a correction? No, we can’t, but it may be a signal that rates won’t get completely out of control as they did in during the inflation battle of the early 1980’s. Mortgage rates exceeded 15% back in those days, and the commercial property market experienced a severe correction. Fear of a similar outcome is what’s weighing on today’s market players, especially those old enough to have suffered the consequences thereof. It wasn’t pretty.
We have said many times in these pages that it was the low cost of capital in combination with the lack of available product that took the market to record price levels (double the last peak in 2007). So, it only stands to reason that the recent spike in mortgage rates will send prices lower. By how much is the big question, and we don’t pretend to know the exact answer. However, it does stand to reason that if the Fed eases up on rate hikes next year and the 10-Year Treasury yield stabilizes, we could be in for a milder correction than many have feared. Even if we experience a short-lived correction of 20% to 25% in property values and then stabilize, that will put us right around where we were less than two years ago. That would likely bring buyers off the sidelines and return market activity to a healthy level while vacancy is still relatively low. In other words, it would signal a possible return to the market dynamics we experienced in the last upcycle.
Is this overly optimistic? Possibly, but it is worthy of discussion. We, along with our clients and fellow professionals, are always looking for the true signal that’s hidden in the noise. The more information you have the better chance there is for a favorable outcome from your real estate strategy, whether that means you buy, sell or do absolutely nothing at all. We will do our best to keep you up to speed.