These Factors Could Jumpstart CRE Transactions

Jeff Matlock

There are growing signs that the market has adjusted after a mid-year pause due to rapid rate increases. The cooling off period that has defined a long hot summer has helped the market reassess asset values, debt costs, and, more effectively model for the shifts in the macroeconomic landscape. Transactions that fell out of contract are returning to market, and negotiations are underway under these new parameters. Deals are getting done. Buyers and sellers are striving to arrive at a new equilibrium with pricing adjustments that reflect the upward movement in lending rates. Lenders are also becoming more motivated to meet year-end allocations with newly competitive spreads and pricing.

With this in mind, we should expect a more active Q4 2022 than what we have seen in Q2 and Q3 for several reasons. There remains an abundance of capital and liquidity in the market, and several motivators exist that should be considered by anyone sitting on the sidelines as we come out of the Labor Day holiday into the homestretch. Here’s a few of those motivators to consider.

Bonus Depreciation

The tax benefits of 100 percent bonus depreciation for real commercial property investments are set to end this year and will begin to taper down to 80 percent beginning Jan. 1, 2023. This tax program will begin stepping down an additional 20 percent of value each year thereafter, before sunsetting completely on Jan. 1, 2027. While not every buyer will choose to leverage this tax incentive, maximizing this benefit before it is reduced should be a consideration for any investor whose transaction has been in the works for a long time and wants to close before the end of the year or individuals who will have a high-income tax bill and are looking for ways to reduce their income tax bill. This will motivate some buyers to transact new acquisitions before the end of this year.

Debt Maturity

For owners facing near term debt maturity, the decision to sell or refinance will depend on asset ownership coming to terms with current financing options and investment performance goals. As leverage requirements compress and reduce cash out at refinancing potential, the costs of a decision to hold should motivate some to become sellers to achieve return targets.

Life Company Allocations

For many life company lenders, the pricing model for their commercial mortgage debt put them at a competitive disadvantage against other capital sources through much of this year. Many of these life companies have begun adjusting their pricing to become more competitive to meet their annual targets for 2022 and balance their internal allocations.

Regional Bank Liquidity

Regional and community banks have emerged as strong competitors for commercial mortgage financing. After an early retreat at the onset of this year’s Fed rate increases, they have accumulated an abundance of liquidity on their balance sheets at the same time their pipelines have dried up from this same retreat. They remain highly competitive on rates with other capital sources. While their underwriting requirements have tightened and leverage requirements compressed, these banks are motivated to get their capital working.

Rate Volatility

For those looking at next year and considering further rate increases, now is the time to consider locking in rates that have stabilized at relatively attractive levels for this new cycle. Life company lenders are particularly attractive in this instance, as they will lock rate at the time of application with varying degrees of flexibility on closing dates, especially appealing to owners seeking to mitigate early payoff penalties.

Reduced liquidity yields fewer opportunities to buy and sell, and investors who find attractive deals will have a much harder time financing them as lenders become more discerning.

Jeff Matlock is director, Gantry.