Industry leaders convened last week in Washington, D.C. for the annual Fall NIC Conference, and while conversations were lively and some people were even jovial, something had definitely changed since the Spring Conference. One person said it was the second most somber NIC he had been to, after 1999. We would not say it was somber, but let’s just say we did not hear of many deals getting done.
We would, however, like to set the record straight from one of the sessions on the first day, when a respected panelist stated that transaction volume was down 40% this year. Not even close to being accurate. Is transaction volume slowing? Of course. But if nothing closed for the rest of the year, the 390 deals year to date would represent the fourth most active year ever.
Next year, with higher interest rates and mortgage rates exceeding cap rates of the recent past, transaction volume could drop 40%. But we don’t believe that will happen, as there will just be a reset in valuation assumptions and sellers’ expectations, something that maybe should have happened coming out of the pandemic. The problem was that people were assuming the industry would come out of the slump operationally. Now, it is the capital markets (interest rates) that will take the steam out of our recovery,
Indicative of how the environment has changed, one major broker with 20+ years of experience told us that, after the first round of bids in a current transaction, he went to the buyers for the “best and final.” In a first for him, every single one came back to the table with a lower bid. We did not hear how the seller reacted, but we don’t think they had a smiley face at the end of their correspondence.
If mortgage rates on a deal are now at 6% or 7%, and climbing, what does that do to cap rates? The answer seems obvious. As one market participant wryly noted at the conference, all of the industry lenders and investors were in attendance, but checkbooks pretty much remained closed for the time being. This will change as the market sorts things out, but for now it may be a slow go through the end of the year. Except, and there is always an exception, we believe there will be an increase in distressed and forced sales of those properties that have not made it far enough out of the pandemic bottom, and their lenders and investors will not wait any longer. This all depends on how much worse the inflationary and interest rate environment gets.
