Interest rates are not only playing a negative role in residential real estate but are now denting what earlier this year appeared to be a rebounding commerical real estate (CRE) market. According to real estate and real estate investment trust (REIT) research firm Green Street, commercial property prices have dropped nearly 13% so far from their most recent peak earlier this year, with prices down 7.3% in October alone.
The Green Street Commercial Property Price Index also reports apartments, offices, strip malls and healthcare-related properties have also experienced double-digit dips. Facilities housing hospitality and self-storage businesses fared slightly better and are down only 6%.
“Higher yields on Treasury bonds equal higher cap rates,” co-head of strategic research at Green Street, Peter Rothemund, said, who also added a discouraging forecast. “As large as the decline in pricing has been, I don’t think we’re out of the woods.” He also said that commercial property prices would keep falling as long as the 10-year Treasury note stays above 4%.
The Federal Reserve has already raised interest rates six times this year, and it’s not finished yet, as Fed Chair Jerome Powell attempts to stall inflation. Investors are planning on another rate hike in December and smaller increases early in 2023, according to Forbes.
Unsurprisingly, savvy investors are ready to pounce, and distressed property values will become extremely popular. The best investment opportunities typically come in a down economy.
“It makes perfect sense to be cautious, but on the flip side, a lot of investors stay active or even turn things up a notch when others are stepping aside,” Marcus & Millichap’s John Chang told Globest.com. “In many cases, the deals they do in these times deliver the strongest returns over the long haul.”
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