Going into 2023 most of the real estate investors I talk to have their brakes on.

Cap rates should have gone up a lot more in 2022. Although we did have good job growth and rental increases in 2022, and GDP came in higher than expected at 2.9% in the third quarter, we had the highest inflation in 40 years combined with the most rapid increase in mortgage rates in 33 years. But it takes one more factor to really push prices up and that’s low interest rates which we had through February of 2022. The rule of thumb is that cap rates compress and push values up as a result of a strong economy evidenced by low inflation, low unemployment, a strong GDP and substantial rental increases.

This meant they would likely be settling for a 2% cash on cash return after their mortgage payment.īy the third quarter of 2022, multifamily cap rates had remained flat, and there was a slight increase for industrial, office and retail according to Moody Analytics. For most, buying high and leveraging low was deeply disturbing. After all, most had read the real estate books that pitch buying low and leveraging high. But the worst headache was having to inform investors they needed to put 50% down instead of the 35% they were expecting. More often, sellers just took their properties off the market which kept cap rates low. Many of our clients got down on their knees to plead for price reductions so we could close their loans. As rates kept going up, our loan sizes kept going down. By Terry Painter/Mortgage Banker, Author of: “ The Encyclopedia of Commercial Real Estate Advice” Wiley PublishersĪs a commercial mortgage banker, it hasn’t been fun in 2022 trying to juggle the most rapid interest rate hikes since 1989 with the high prices on sales contracts.

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