2023 ended the way it began, with low transactional velocity. While larger transactions over $10 million were rare, the market for transactions under $3 million continued. Total leasing velocity of 11.84 million SF was essentially in line with 2022 and over 90% of the record velocity seen in 2021. The market has shifted away from “mega” distribution deals in the 200,000+ SF range, with more deals getting done in the sub-100K SF space. This is impacting our clients as owners of 50K SF product may find themselves competing with new construction buildings which are now willing to subdivide. Despite the numbers, anecdotal evidence points to a normalizing leasing market, a departure from the extremely landlord-friendly start to this decade.
High interest rates continue to plague both private and institutional investors. During the latter half of the quarter, rates fell significantly as the ten-year treasury dropped below the 400 level after hitting 5% earlier in the year. Despite this decline, borrowing costs remain near the 7% range. Lenders are not eager to make new loans today. Many are demanding substantial deposits as a material inducement to grant a new loan. Traditional banks are looking for durable cash flow. This is causing some value-add borrowers to seek out private lending solutions for transactions that would have historically been funded by local banks. As time continues to separate us from the March bank failures, we hope that lending constraints will ease, strengthening the market.
Going forward, we are waiting to see whether fatigue, refinancing pressures, and lifestyle cycles begin pushing more sellers to the market. In the first weeks of 2024, we have completed a record number of building valuations. This is a key indicator that owners are again contemplating sales. In the industrial world, many owners still have massive gains, especially anyone who purchased before 2020. Office buildings with stabilized rent rolls will need to decide whether to sell or hold out through an additional lease rollover. Syndicators and other sponsors are making bets on whether values will increase enough over the next 12-36 months to justify delaying the sale of a successful value-add project. Even if values increase 15%, many of these deals will experience falling internal rates of return. In the private client space, 8 cap industrial deals are available if you look closely. With cap rates off approximately 50-100 basis points from peak pricing, now may be the time to buy.
Feel free to reach out to me to discuss the market, refinancing scenarios, or the value of your property.
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