Holding The Line: Landlords Keeping Assets Off The Market Until Buyer Pool Deepens Again

A vast gulf has formed between what property owners think their properties are worth and what buyers can pay, all but killing the investment sales market in the U.S.

Many landlords and investors are financially insulated to weather an economic downturn, meaning there is likely to be little opportunity for buyers until the Federal Reserve finally ceases its interest rate hikes and capital markets settle down again, CRE professionals said during Bisnow's Atlanta 2023 Outlook event Tuesday morning.

“Companies ... have more cash on the balance sheets than ever, so they’re able to kind of bolster their assets and not be forced,” Peachtree Group Chief Investment Officer Jatin Desai said during the event held at Prominence Tower in Buckhead. “Sellers were just like, ‘Alright, well, I don’t sell today and I’m not even forced to sell, so let’s see what happens next year.’ As interest rates are rising, the bid-ask spread is so wide that there’s just a divide.”

The Fed's aggressive rate hikes this year — a total of 375 basis points so far this year to push its benchmark rate close to 4% — have chased many investors out of the market as debt has become more expensive. Major lenders who have increased their exposure to real estate in recent years have all but disappeared from the market.

“A lot of the big lenders are just basically on the sidelines. So you're going to more of the small groups, credit unions, smaller regional banks that still want a lot of these assets,” Northmarq Managing Director Mike Sladich said.

At the same time, landlords are reticent to sell properties since rising rates are pushing property values downward. The pool of groups willing to buy assets has been whittled down to a collection of investors using creative financing terms or cold, hard cash, panelists said.

Amy Curry, the chief strategy officer with the industrial investment and development firm Dermody Properties, said the warehouse sector saw a flood of all-cash buyers recently.

“There was a tranche of all-cash buyers out in the market that could not compete in the peak of the market that now saw a great opportunity to execute,” Curry said.

In the still-chugging industrial sector, all-cash buyers have been able to find deals, but those days could be coming to an end as many landlords have pulled listings from the market, Curry said. 

“[All-cash buyers are] a limited pool of investors. I think that it probably has seen its day,” she said. “There will be some still out there, but that was the bulk of the activity for industrial this year.”

The hotel industry also is seeing cash buyers, or buyers who are putting very little leverage on their purchases to wait out the havoc in the capital markets, Desai said.

“People that have to put capital [out] are doing then … all cash, or little leverage and waiting for leverage to come back and refinance in the next 18, 24 months,” Desai said. “So if you’re forced to do it, you’re putting it down to a lower return. That’s kind of the nature of it.”

Cash buyers are common in the residential real estate market, where a third of all home transactions were sold using cash-only this past July, according to a Redfin study.

Commercial real estate sales have decelerated greatly this year, down by half the volume in the third quarter compared to the same period last year, according to Avison Young. It’s unclear how much of that volume was purchased using just cash, but it’s not uncommon for 1031 exchange investors to pay cash for their investments, especially in the net-lease sales market, Northmarq Managing Director Mike Sladich said. 

“We’ve definitely seen a lot more people paying their taxes that we didn’t see before in hopes of, you know, that interest rates would come down a little bit or cap rates would go up so that their purchase [in] all cash might actually be the same,” Sladich said.

While there may be some willing buyers in the market, there are far fewer landlords feeling the pressure or need to sell their assets, especially at a loss because of some trigger event, panelists said. 

“So if you have 4% fixed-rate debt for the next five years, [and you] have three years left on your loan, why are you selling?” Desai said. 

The Fed’s interest rate hikes also have dampened developers’ abilities to launch new projects, panelists said.

“If we were trying to start this project in today’s current environment, we’d be begging the land sellers for more time because we simply would not be able to get it financed,” Lincoln Property Company Southeast Executive Vice President Tony Bartlett said. 

LPC is underway with Echo Street West, a mixed-use project just west of Georgia Tech’s campus in Midtown that will feature 292 apartments, 300K SF of creative office space and 30K SF of food-and-beverage-centric retail. While the project broke ground pre-pandemic and pre-rate hike, Bartlett said Lincoln still has to to overcome headwinds it didn't foresee.

“From when we conceptualized it, clearly a very different market at that time the wind was at our back, you know, all systems were go,” he said. “You got to believe in [your project] because the challenges and the changes are consistently coming at you.”