Capital Markets

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Capital Markets

IT’S NOT ILLIQUIDITY, IT’S PRICING

Economic Drivers

The Fed is expected to cut interest rates as inflation moderates, which should happen more meaningfully as shelter inflation decelerates. We have two 25 basis points (bps) cuts penciled in for 2024, followed by four next year and four in 2026.
An acceptance of a higher-for-longer environment has permeated the market, leading to renewed optimism that transaction velocity will pick up sequentially this year. This has been corroborated by an improvement in CMBS originations, which are up 155% year-to-date through April versus the same period last year.
At the long end, the 10-year rate is expected to hover near 4% over the medium term. Credit spreads across asset types (corporate bonds, CRE, etc.) should avoid a rapid expansion given economic resilience. They are historically tight, however, at present and will trend slightly wider as growth slows and becomes more uneven.

Outlook

Investors will remain income-focused for the foreseeable future as existing debt slowly reprices into the higher rate environment. Fortunately for most asset classes, the NOI outlook is decent if not robust, growing by 1.5% to 2% this year and next (in a diversified portfolio) before accelerating to the 4.5% to 7.5% range in the following years.

Despite the fact that some measured cap rates will march upwards as credit spreads normalize off higher base rates, we forecast that total (unlevered) returns will once again reach double-digits and high-single-digits in 2026 and beyond.

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Capital Markets

Buyers and sellers are growing increasingly more open to act, though both sides remain cautious and selective in the near term. Debt maturities and other liquidity-based needs (including redemptions/withdrawals) should continue to motivate sellers to meet the market, thereby improving price discovery for the marketplace more broadly.

The long-awaited distress wave will continue to disappoint opportunistic capital sitting anxiously on the sidelines, as the process unfolds at a slow, sequential, and often boring pace. In Q1 2024, only 3.9% of total sales were distressed and many delinquency rates remain low or are holding steady. This is obviously not true for office where expected distress is greatest—as well as for regional malls and hotels.