In 2023, the Sterling brokerage team remained actively engaged in leasing, land sales, and catering to owner-occupier sales. The steady flow of transactions throughout the year was sustained by Montana’s robust economic prospects.
However, investment activity experienced a decline due to increased borrowing costs, making investments more challenging. Sellers, buoyed by recent substantial gains in property value, were reluctant to reduce prices. Additionally, uncertainty in valuation arose from the shift in cap rates, transitioning from the historically low levels of 2021 and 2022 to more typical ranges.
As 2023 comes to a close, positive news emerged for commercial real estate investors. On December 13th, it was announced that the Federal Reserve is likely to maintain steady interest rates, with expectations of rate cuts in 2024.
We approached our brokerage team to gather insights on how the shift in monetary policy will impact commercial real estate activity in 2024.
Monetary policy is seldom written in stone. While this is a step in the right direction for commercial real estate, there is always the possibility of a shift. Given that this is an election year with mixed feelings on the economy, anything can happen. In the best case, if rates do drop, it will take some time for those to settle into the market. Investors, sellers, and developers will need to recalibrate before moving ahead. I don’t expect an immediate cure-all for commercial real estate in Montana.
Taking off from Matt’s thoughts, the general consensus is that, barring a “Black Swan” event like the Great Recession or COVID, we aren’t likely to see interest rates at historically low levels. With the Fed’s goal of hitting its long-run outlook in 2025/26, anticipate commercial real estate transaction activity, which saw close to a 50% drop from ’22 to ’23, to pick up in 2024 with opportunistic acquisitions.
Investment sales and development have been heavily impacted during the recent rising interest rate environment. While the pause and projected cuts are good news today, we will need to see how comfortable investors and developers feel about re-entering the market in Q1 2024. The pause may be enough to bring a handful of investment sales through to the finish line, but exit cap rates are likely to remain conservative until we see long-term stability in the capital markets. With construction and land costs remaining elevated, developers may wait to see rate cuts before moving ahead with currently tabled speculative projects.
The Fed signaling a pause or even a drop in rates indicates that they have hit their target inflation rate. This spells relief for retailers grappling with inflationary products. If retailers fail to increase prices concurrent with inflation, it can impact their bottom line. The Fed’s announcement should allow retailers to forecast more accurate sales and provide stability in an otherwise relatively unstable market. This is positive news for retailers and investors alike. The strong job market and tempered inflation should give both the capital and space markets for retail the confidence to grow in 2024.
The high rate environment of 2023 steadily compressed pricing throughout the year. Sellers are finally grappling with the realities of the higher interest rate world, allowing buyers to acquire assets at below peak pricing. The 2024 outlook for the Fed should make equity raising for syndications much easier than 2023. Groups with long-term business plans and value-add mindsets should start to see good buying opportunities materialize by Q2 2024.
