Capital Markets Forecast for the Latter Half of 2023

Throughout the first half of 2023, the capital markets landscape continued to face headwinds driven by persistent inflation and rising interest rates. With this economic turbulence top-of-mind for investors, in addition to market trends such as deglobalization and the resurgence of onshoring and near-shoring, investment activity has slowed, which will likely extend through the remainder of the year.

We believe interest rates will likely remain higher for a longer period of time than we all might wish. However, there are still opportunities for investors to capitalize on, and we will continue to supply our clients with market-driven data and the insights they need to drive investment strategies in the latter half of 2023. 

Multifamily remains resilient

Despite slowing investment activity, the multifamily sector remains a robust and favored asset class due to its underlying fundamentals. The sector exhibits the largest and most liquid portion of the commercial real estate investment market in the United States, and multifamily sales have accounted for a third of all transactions this year. Although this year has seen an elevated supply pipeline with thousands of new units coming online, annual rent growth and year-end occupancy rates are expected to be near or higher than the pre-pandemic averages — reinforcing the sector’s resilience. 

While cap rates have continued to steadily increase across the board, the average cap rate in the multifamily sector remains the lowest among all U.S. commercial real estate sectors, which has become an increasingly attractive element as investors continue to face a tightening lending environment.  

Additionally, long-term projected economic and demographic trends such as heightened absorption and increased leasing activity offer optimism for investors looking to re-enter the multifamily sector.

The state of financing

Lending conditions have continued to tighten, making access to capital increasingly difficult for investors. In terms of lenders, government-sponsored enterprises (GSEs) remain the largest source of financing for the multifamily market, however they too are tightening their standards. While the cost of capital has increased over the last year, the availability of capital remains strong compared to previous down cycles — an important factor to note when taking into account the short-term, floating-rate debt coming due in the next several years.

While banks continue to tread lightly with commercial lending since the collapse of Silicon Valley Bank, they have not completely dried up, and banks still have offers for specific clients and conservative properties. Life insurance companies have been stepping in to fill several voids left by the banking contraction, active across multifamily and industrial sectors, across multiple loan terms, and there are even numerous lenders actively offering floating- and fixed-rate construction loans.

Recently, we’ve seen investors turn their attention toward capital raising for value-add and opportunistic investments. Specifically, Berkadia has partnered with many investors seeking to raise funds to acquire distressed assets or fill gaps in the capital stack by providing preferred equity and mezzanine debt — a trend we don’t predict will slow in the near future.

Today’s key players

Given current market conditions, it’s no surprise that private investors are dominating investment activity. Many institutional investors have taken to the sidelines to manage redemptions, to rebalance their portfolios, or to await further stability and transparency within the market. In terms of cross-border capital, the Asia-Pacific region remains highly interested in U.S. real estate due to its stability. Asian investors are especially interested in the living sectors and view current market conditions as an opportunity to expand their U.S. portfolios while many domestic investors remain sidelined.

Finding value amid current economic uncertainty

Amid the rise of a “wait-and-see” mentality across the commercial real estate industry, we’ve found that supplying investors with real-time, data-driven insights helps to inform their acquisition and disposition strategies and sustain anticipated returns.

As many capital sources dry up, having relationships with a broad base of lenders is more important than ever. Berkadia’s connections to a wealth of capital sources, ranging from GSEs, JV equity, life insurance companies, banks, REITs, CMBS/conduits, and debt funds, have allowed us to provide our clients with immediate, short-term and long-term financing solutions. Additionally, our recently formed alliance with global property consultancy Knight Frank provides our clients with greater access to domestic and internationally-based capital — an invaluable advantage in today’s tightening market.

In the latter half of 2023, we anticipate the commercial real estate industry to continue to face headwinds. However, by aligning your endeavors with capital markets advisers who have weathered these conditions, there is an opportunity to continue to find value amid current economic uncertainty.

Mike Miner is senior vice president and co-head of investment sales and production operations at Berkadia. Cole Schutjer is senior vice president and co-head of mortgage banking and production operations at Berkadia.