In the last couple of months, we have heard from a number of people in the dealmaking business that rising interest rates have caused their potential buyers to hit pause, and a couple of major investors even said that pencils were down for the time being. We can’t say we’re surprised, given where wages have gone and what other issues inflation has caused. And if future earnings are affected by permanently higher labor costs alone, then the higher debt payments caused by higher rates really won’t cut it for those buyers. We have also heard that bid-ask spreads were widening, which will affect transaction volume.
The terms “bid-ask spread” and “pencils down” conjure up memories of the worst of the pandemic, but we aren’t close to that right now. M&A may have dropped since the heights of December 2021 and January 2022, when 57 and 63 deals were announced, respectively. But the market has been bouncing between 35 and 50 deals a month since then, which is certainly not anemic. And we will likely surpass 40 transactions in the month of August too. How many deals there could have been without interest rate concerns, we don’t know.
Property prices will almost certainly come down, unless you’re talking about a skilled nursing facility these days, bringing more buyers to the table at more conservative valuations. And we are betting that there are still plenty of sellers willing to get out at a lower price, given the operational headaches that are not going away. Then, we could see records broken in M&A yet again.
