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Investors who suffered through 2022s dismal market are probably wondering when things will get back to normal. Most major asset classes have posted strong returns for the year to date through Jan. 26, but there's no guarantee these positive trends will continue. A potential economic recession, the pace of future interest-rate increases, and whether inflation will continue moderating are all wild cards that could cause another series of market drops.
The rapid rise in interest rates and ongoing uncertainty around the timing needed to reduce inflation to the fed's target levels has caused significant disruption in the capital markets and a period of price discovery within real estate values. The result is very limited transaction activity and inefficient debt for most assets. Most of the transaction activity has involved forced sellers due to liquidity needs, debt maturities or properties with fixed-rate assumable debt. Deals getting done have seen around a 50-100 bps increase in cap rates due to the increased base rate and widening of spreads. The market is pricing in a steady reduction in rates in 2024 as the levels of inflation continue to decline. There remains a significant bid/ask spread between buyer and seller during this period of uncertainty, but it's starting to narrow. As the market stabilizes and the capital markets reopen, expect debt spreads to compress and transaction activity to pick up.
“A man who has nothing which he is willing to fight for... is a miserable creature who has no chance of being free.”
— John Stuart Mill----On Liberty
— John Stuart Mill----On Liberty