After 17 consecutive months of double-digit annualized value growth on commercial property investments, the rising interest rate environment of 2022 has led growth rates to cool nearly as quickly as they accelerated in late 2020 and throughout 2021. According to Real Capital Analytics (RCA), the average value of commercial properties rose 0.4% in August 2022, for an annualized growth rate of 4.8%, which is 400 basis points lower than the 5-year rolling average of 8.8%. Industrial continued to lead the value growth, with the previous momentum in multifamily decelerating most significantly to a 1.1% annualized growth rate.
Source: RCA CPPI (Commercial Property Price Indexes)
Commercial property debt rates have remained volatile, changing significantly even on a week-by-week basis. According to Bellwether, for the week of September 20, 2022, 10-year interest rates for office/retail are 5.15% – 5.80% with life companies and 6.62% – 7.62% with CMBS. This is up significantly from even a month ago, where in the week of August 16, 2022, 10-year rates for office/retail were 4.54% – 5.09% with life companies and 5.89% – 6.89% for CMBS.
Source: Bellwether Enterprise Real Estate Capital, LLC (BWE) Weekly Rate Sheets https://www.bwe.com/weekly-rates
As asset price growth has begun to slow, cap rates have also risen in recent quarters, according to CBRE’s commercial sale comps collected in the first half of 2022. However, these cap rate increases have lagged increases in the 10-Year Treasury, causing spreads between the two to tighten. CBRE’s survey respondents overwhelmingly expect cap rates to increase in the coming months as rates continue to rise and spreads begin to widen.
Source: Federal Reserve, Macrobond, CBRE Research.
According to other CBRE data, CMBS loan production fell by 59% from Q2 2021 to Q2 2022, largely due to volatility in the credit markets. Fannie Mae, Freddie Mac, and Life Insurance Companies all increased total lending volume over the same time period to largely offset the drop off in CMBS originations.
Source: CBRE U.S. Capital Markets Figures Q2 2022.
As a result of rising interest rates, softening price and rent growth projections, and a lag in cap rate spread widening to compensate for the increased cost of capital, transaction volume has quickly slowed. Total transaction volumes are hovering around $200 Billion nationally for $25 Million+ transactions through the first half of September 2022, already eclipsing 2020’s total transaction volume but representing less than half of the total 2021 transaction volume.
Source: Green Street.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Vice President, Development
Boyd Watterson Asset Management, LLC
