A Review of Capital Markets Performance in Q3 2023
After the close of Q3 2023, the global economy stands as a testament to resilience, weathering the challenges posed by significant monetary tightening, and most CRE sectors have remained relatively stable despite economic volatility. This capital markets update delves into the highlights from the past eight months, the outlook for CRE, and the evolving narrative around potential recession risks.
According to the recently released Matthews™ Mid-Year 2023 Investor Survey, 61% of investors are somewhat concerned that a recession will ultimately affect the CRE market within the next 12 months.
CRE Outlook
Throughout 2023, capital market activity has been subdued due to the rapid increase in capital costs and the uncertainty surrounding where and when these costs will stabilize. A significant concern has revolved around refinancing maturing debt. An improved macroeconomic environment since 2022 has uplifted economists’ outlook for 2024, but investors must be wary of the tangible challenges that lie ahead. Limited accessibility of credit has severely hampered transaction activity, which has experienced a nearly 60% decline nationwide, posed difficulties in determining accurate pricing, elicited apprehension from regulators and investors, and created an uncertain future for this asset category. The industry is at a crucial juncture, as the shortage of transaction activity due to elevated credit costs dampens price discovery, concerns regulators and investors, and shapes a pessimistic outlook.
As of H2 2023, 63% of investors were either holding onto assets/waiting on the sidelines, a 25% increase from investment approaches at the beginning of the year. – Source: Matthews™ 2023 Mid-Year Investor Survey
Due to elevated interest rates and a more cautious approach to underwriting characterized by reduced loan-to-value ratios, making deals financially viable has become progressively more challenging. According to NAI Global, Industry experts have noted that securing debt for projects worth $20 million or more has become increasingly difficult. However, on a positive note, $10 million or less investment-grade properties are still going strong.
It will remain to be seen how the CRE capital markets will evolve for the remainder of the year. As we look forward, the prevailing trends and challenges in the capital markets and CRE sectors lay the groundwork for the coming years. It is important to note that those with a contrarian view of the market can take advantage of the opportunities within the CRE space while other investors are taking a step back to see how the remainder of the year plays out. Contrarian investing can be a powerful strategy for generating long-term investment returns. Still, it requires a patient and disciplined approach to identifying undervalued assets and avoiding the herd mentality.
Despite a low transaction year, experts have more positive expectations for 2024. This change in outlook can be attributed to easing inflation, a still-strong labor market, and economic resilience.
By remaining vigilant and adaptable, investors and professionals can position themselves to thrive amidst the complex currents of the capital markets. In the evolving landscape of economic shifts, borrowers should depend on reputable debt advisors to assist them in navigating these changes.
