Like everything else, the commercial real estate business has seen changes due to the pandemic in the past two years. Add another catalyst to the mix, global inflation and we have a whole new ball game. This fall we have seen a change from the previous fall in interest rates.
Commercial real estate investors and lenders are viewing underwriting in a different perspective than times past. This is due to how investors are working with debt. Currently, the cost of debt is higher making the old on commercial real estate weaker than it was six to twelve months ago.
The Commercial real estate industry is hesitant because this certain rate environment has not shown up in a long time. The competitiveness of the market has also slowed down because a lot of the pent up demand that was seen after the worst of the pandemic is now gone.
Buyers and sellers are working at a slower pace than just six months ago. Transactions are being thought through more with the change in interest rates and capital markets. In fact, many commercial real estate lenders are stepping away altogether.
Inflation has also slowed things down. Labor cost and material cost have seen an extreme rise in costs . This has a big impact because when both lenders and investors look at future cash flow, these higher costs can dampen the profit margin. The Southeast market has actually seen double-digit rent growth already from this time last year.
When it comes to international affairs, interest rate hikes and the potential of a recession the capital markets are uncertain causing an upset in capital markets. This has become a challenge for lenders and their ability to lend.
There has also been a change in the demand for many lending products. Investors are looking for more long-term and fixed-rate lending products. The drastic shift can be blamed on the fast-rising interest rates.
As for the state of the current commercial real estate lending market, lenders still have maintained underwriting standards and the leverage has not gone completely unhinged. Structures are still sturdy and there is still a lot of equity capital in deals today. Last year saw a record year due to the floodgates opening after the pandemic restrictions. We are in a more measured environment but that does not mean it is not an active market.
