Colorado-Real-Estate-Journal_372210

Page 4 — Retail Properties Quarterly — November 2023 www.crej.com FINANCE uproperties.com M I N N E A P O L I S | D E N V E R | AU ST I N A s we come to the close of 2023 and look ahead to the new year, many questions linger. Where can we expect interest rates to settle? How far will cap rates expand in response to the uncertain debt mar- kets? How long will it take for the expansion to drive sales volumes back up? Most importantly, what can own- ers do to protect their assets from the often sudden changes in eco- nomic conditions? While no one has a crystal ball, there are certain trends to keep an eye on as we transition into 2024. Knowing what to look for in the economy and market will not only allow owners to prepare for various possibilities but also avoid being blindsided by further shifts in the market. n State of the market and what to watch. According to data from CoStar Group, nationwide sales across the five main property types fell 53% in the first nine months of 2023 compared to the same period last year. The sectors more sensitive to ris- ing interest rates, such as multifam- ily, office and hospitality fell 65%, 57% and 58%, respectively, during this period. Industrial sales fell by 44% and retail by 37%. As we know, this is due primarily to the rise in interest rates. Fortunately, the Federal Reserve left interest rates unchanged at its monetary policy committee meet- ing Nov. 1. This was the second con- secutive meeting where the central bank abstained from an increase in its current poli- cy-tightening cycle. Looking ahead to 2024, eight meet- ings are scheduled to set the federal funds rate starting on Jan. 31. Many believe the Fed will continue to pause further rate increases while it observes how the U.S. economy continues to react. When it might resume increases depends on key economic indicators such as inflation rates, gross domestic product growth and employment levels. Taking a closer look, the past 18 months of rate hikes have slowly curbed inflation, which came in at 3.7% as of September. The Fed’s goal of 2% inflation seems to be in reach, but it’s still being held back by other factors such as consumer spending, which has remained robust and led to an increase in the prices of goods and services. Many economists predict consum- er spending to level out as the costs of leisure activities and regular consumer goods continue to rise. American credit card debt being at an all-time high (surpassing $1 trillion) should also factor into the anticipated decrease or at least flat- ten spending. If you’re making decisions based on predictions of future federal funds rate decisions, the main things to keep your eyes on are inflation and consumer spending. n Cap rates now and down the road. With the federal funds rate cur- rently at 5.25%-5.5%, interest rates for commercial properties are in the 6.75%-8%-plus range depending on property details, loan terms and the lender. This change has slowly led to an expansion in cap rates across all property types. According to CoStar, the average cap rate for all U.S. retail sales was 6.74% in the third quarter. The average for the Denver metropolitan statistical area in the same period was 6.2%. In looking at the overall average for retail sales in Denver and nationwide, the cap rates have not increased enough for underwriting with current debt to meet sellers’ pricing expectations. This is reflected in the steep decline in 2023 sales. Looking ahead, CoStar forecasts an increase in the average cap rate for all Denver retail sales, poten- tially reaching 6.46% in first-quarter 2024 and 7.43% in first-quarter 2025. The U.S. average for retail sales dur- ing the same two quarters is fore- casted at 7% and 8.07%, respectively. If these projections prove to be true, investors with significant buying power during this time are expected to “buy low” into the over- all market as CoStar predicts the cap rates on retail sales will plateau in mid-2025 and start to decrease in 2026. However, many investors are cur- rently waiting “on the sidelines” to see what the market does next. Once the Fed’s rate hikes level out, investors are likely to become more comfortable with the lending envi- ronment and begin to place more What to expect, how to prepare for what’s next Josh Lorenzen Associate, Blue West Capital Please see Lorenzen, Page 17