Matthews™ Market Movers, Q&A

Q4 2022 activity was down significantly year-over-year because of the historically heightened real estate market in 2021 and the volatility in the interest rate environment for most of Q2 and Q3 2022, when Q4 closings would have been negotiated. Most real estate investment groups are projecting market stabilization towards Q2 2023, deriving from interest rates, therefore leading to cap rate stabilization. However, the supply and demand imbalance will keep a competitive environment in 2023. Fewer deals will hit the market, leading to strong offer activity that will keep cap rates competitive. Additionally, from a renter’s perspective, the lack of supply will continue to lead to rising rental rates and strong rent growth assumptions. It’s unlikely that we will continue to see similar rent growth from the past 18 months. Still, rents will continue to be strong and positive in the Southeast region, creating an environment that will continue to benefit both buyer and seller in most transactional scenarios.

In the self-storage market in Q4 – transactions were still getting done, but only about half of what was transacted in Q4 2021. However, Q4 2021 was the highest volume quarter in the self-storage industry’s history – with over $7.6B being bought and sold across the country in the month of December alone.

This year, rental rates are still elevated compared to pre-pandemic prices, and occupancy remains strong nationwide. Lenders are still favorable towards storage, and there is no shortage of capital chasing deals – it all comes down to pricing on these assets when you look at whether or not a property ultimately sells. Due to the increasing difficulty in selling facilities at strong values at Certificate of Occupancy, or ones early in lease-up phases, we are advising developers to be patient for occupancy and cash flow to rise, as values will rise significantly with them.”

“We certainly faced head winds in the fourth quarter but we were fortunate to still meet our production goal…everyone worked a little harder, developed and worked with creative financing structures to meet borrowers needs. It’s times like these where we dig in, keep pushing and find a way to the finish line”

“The net lease market will perform fundamentally different moving forward than it performed over the last 40 years. While change can be difficult, it creates a tremendous opportunity for investors and brokers willing to put fourth the effort.”

Buyers continue to stay patient while sellers come to grips with new market pricing. Some overpriced deals are getting bailed out by exchange buyers most are in search of offers. I expect this trend to continue for the first two quarters of as pricing slowly adjust.