The Fed’s Impact on CRE Values

Zachary Urow June 15, 2023

Fed Recap

The Federal Reserve decided to pause on increasing interest rates on June 14th, 2023. Since March of 2022, the Fed significantly increased the federal funds rate from 0.25% – 0.50% to 5.00% – 5.25%. The Fed wants to see how previous rate increases will affect the economy before making more decisions due to the inherent latency period.

Fed’s Next Steps

The Federal Reserve indicated that rates will increase throughout the remainder of 2023. The Fed believes that rates will increase 2 more times this year to combat inflation. Inflation peaked at 9.1% in June of 2022. Since then, inflation has decreased to 4%, which is still around double the Fed’s goal inflation rate. The chart below shows the historical inflation rate over the last 20 years.

Fed’s Impact on CRE Values

Since Q4 of 2022, self-storage values have decreased by about 10% – 20%. Values decreased from an increase in the cost of capital and a decrease in rental rates. The chart below shows how much national average street rates for 10’ x 10’ units have changed since 2021.

Rates have been consistent since their 2022 highs and slightly increased by 0.8% in April of 2023. Despite challenges with interest rates and rental rates, the buyer pool for storage facilities remains strong. Most institutional buyers are behind on their acquisition metrics in 2023 due to the gap between buyer and seller opinions of value. Buyers are immediately impacted by increases in their cost of capital. Sellers take more time to adjust to changes in value. It is challenging for sellers to accept that the value of a facility can decrease due to macroeconomic factors, even if the performance of a property remains the same or slightly increases.

Our Prediction on CRE Values

We predict that interest rates and cap rates will increase and values will decrease by the end of 2023. Buyers raised a record amount of equity and need to deploy it this year. They are willing to pay a premium for deals to achieve their acquisition metrics. In other words, they are willing to pay sellers values today based on pro forma or future value. They are targeting core markets, secondary markets, and tertiary markets. Also, they are open to development deals, conversion deals, C of O deals, lease-up deals, and stabilized deals. Most buyers expanded their acquisition criteria to buy any type of deal in any market that meets their current or expected return thresholds. Please reach out to Urow Real Estate if you have any questions about the market or your commercial real estate.

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