Distress and Opportunism Unlikely to Breathe Life into Sluggish Market without a Creative Finance Defibrillator

October 19, 2023

Distress and Opportunism Unlikely To Breathe Life Into Sluggish Market Without A Creative Finance Defibrillator?

For a moment at the end of Q3, investors saw the temporary lull in the Fed’s rate-hikes as good news; but their optimism soon evaporated. Following its September 19th-20th meeting, Federal Open Market Committee’s Chair, Jerome Powell, announced that the Federal Funds Rate, already at a 22-year high, was likely to move even higher before the year-end.

“The process of getting inflation down sustainably to 2%”, he said, “has a long way to go. In fact, I do not anticipate annual inflation reaching our targeted 2% until 2026.”

This is yet another setback for beleaguered CRE investors hoping for relief from an elevated cost of capital that has pummeled property values over the past 15 months.

It is difficult for the market to reset in an environment where buyers find it hard to build a capital stack and owners are facing depleted asset values.

The assets that are trading tend to fall into two general categories at opposite ends of the spectrum: fire sales of troubled assets and sales of the higher quality assets that provide significant immediate liquidity. Mid-tier assets are likely to remain paralyzed by the inertia of a still wide bid-ask spread.

In previous market slowdowns, the combination of seller distress and buyers’ vulture-opportunism was a powerful re-activator. But this time, with credit tight, creative structured financing is the only defibrillator.

The future? Significant levels of liquidity and price discovery are only likely to return to CRE markets once buyers, sellers, and lenders have greater clarity on the long-term price of debt.