The Capital Markets are back! (but fundamentals are another story.)

For the first time ever, the US has surpassed $450B in sales during the first three quarters of the year*. Leading the way are individual sales (75% of total) of industrial and multifamily assets (combined for 59% of totals.) Prior to this year, record sales had not been seen since 2007. In that year, volume reached $448B, with office and retail via entity-level transactions as the primary driver. In spite of slowly creeping interest rates, risk premiums continued to shrink as investors drove up pricing. Some speculate that as fundamentals eventually catch up, that NOI growth will bail out returns.

All of this deal making has had some interesting effects on the debt markets. Insurance companies, agencies and balance sheet lenders blew through their investment allocations earlier than ever. Pricing began to widen as capital providers, tried to accommodate even more volume. Buyers hoping to meet sellers’ year end closing requirements are facing an uphill battle with traditional lenders during the 4th quarter. Many loans that should have gone into the permanent market have instead been taken down with bridge loans due to speed and seasoning requirements.

What does all this mean for the 4th quarter? Expect a mad rush, as sellers try to avoid the 2022 capital gains increase, to be met with higher spreads on loans. More assets will go into the bridge market with investors taking making bets that cash flow will escalate faster than rates will as they race for a fixed rate solution or an exit.

*according to Real Capital Analytics 3rd quarter report.

– David Eyzenberg (Adjunct Professor at NYU Schack Institute of Real Estate & University of Miami Herbert Business School)