Investment volumes have held strong this year, but rising interest rates could be the road block ahead. The Fed has increased short-term rates several times this year, and the industry consensus is that rates will rise again in December and through 2019. While interest rates could mean slower investment activity—and therefore lower investment volumes on the horizon—Gary Bechtel of Money360 says that supply shortages, particularly in multifamily, will continue to fuel strong investment activity at least through the next year.
“I expect interest rates to continue rising throughout 2019, as this is generally the case with a functioning and stable economy. As capital becomes more expensive, I expect to see investors begin to seek more debt exposure across all asset classes,” Bechtel, president of Money360, tells GlobeSt.com. “The commercial real estate industry is poised to continue performing well despite rising interest rates because there’s still insufficient supply, especially in multifamily assets, across the U.S. In addition, the commercial real estate industry has room to run in developing the right assets to serve a growing online retail industry with warehouses and distribution centers. These demand-driven trends should continue in 2019.”
This year, investment sales met Bechtel’s initial expectations, with steady growth fueled by the growing economy. The activity also produced one of Money360’s busiest years. “We’ve had steady growth in commercial real estate investment throughout the past year, meeting expectations,” says Bechtel. “The commercial real estate sector has responded positively to the thriving economy, which at Money360 contributed to one of our strongest years of growth to date. Commercial real estate saw a surge of activity from investors across a broader footprint of the globe than we had seen in years prior, which can be attributed to both an increase in the number of available investment vehicles in the industry and a strong global sentiment about investment in U.S. real assets.”
Next year should follow a similar trend, even as interest rates continue to rise. Bechtel says that there will also be a boost in activity from the recent opportunity zone fund program, and capital will continue to find opportunities in secondary markets. “Real estate will maintain steady momentum throughout 2019, helped along by renewed interest from Opportunity Zone legislation that provides tax incentives for certain real estate investments. On the lending side, we’ll see continued interest in alternative lenders who are innovating to ensure an efficient process and strong lending standards for borrowers,” says Bechtel. “We’re already seeing demand for longer-term bridge loans, suggesting borrowers want to stay with alternative lenders through more of the lifecycle of their real estate work. From a geographic standpoint, secondary cities throughout the U.S. should see strong growth as people migrate out of major metropolitan areas due to high costs of living and insufficient housing.”
While the year won’t be without its challenges, interest rates—which are still at historic lows—won’t be among them. Rather, Bechtel says that strong competition will be the biggest obstacle in the year ahead. “Moving into the new year, investors will need to cut through the noise and competition of the market and ensure they are finding solid real estate investment opportunities and experienced partners to help across the lifecycle of an asset,” he says. “Increased capital demands in commercial real estate has given rise to inexperienced lenders, and as a bear market looms, it’s integral to apply expertise from past market corrections to ensure stability moving forward. Make sure your investments are backed by trusted and experienced lenders who adhere to strict underwriting standards to safeguard your investments.”
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