Marcus & Millichap: Investors ‘Re-Evaluate’ Transactions Amid Shifting Landscape

A sharp increase in 10-year U.S. Treasurys and expectations of tax code changes next year has encouraged many investors to reassess their strategies, reported Marcus & Millichap, Calabasas, Calif.

“The shifting landscape will likely reduce transaction activity in the fourth quarter compared with 2015,” Marcus & Millichap said in a special report, Emerging Trends.

The unanticipated presidential election result sparked a shift in several dynamics that now ripple through the commercial real estate market, Marcus & Millichap said. The 10-year Treasury rate jumped 60 basis points following the election, and potential tax code changes inspired many commercial real estate investors to rethink their investment approaches.

“Some transactions that were targeting a 2016 close will likely be delayed or canceled as investors and lenders recalibrate their underwriting assumptions,” the report said. 

Commercial real estate capital markets still show liquidity, but the rise in the Treasury rate will increase loan rates. “Overall, lenders are exercising more caution and tightening loan-to-values,” the report said.

The fourth quarter typically constitutes nearly 30 percent of annual CRE transactional activity, and last year a record 15,350 transactions pricing for more than $1 million in the four main property types closed in this period, M&M noted. But transaction activity “will likely downshift” this year, the report said.

Commercial real estate sales had already shown moderation from last year’s cyclical peak, but the rapidly evolving 2017 outlook under a new president adds additional uncertainty for some investors. “Prospective modifications to fiscal, monetary, regulatory and trade policies brought on by the new administration could hold significant implications for investors in commercial real estate,” the report said. “While the expected changes are not likely to dramatically impact the underlying drivers that are supporting commercial real estate performance, an anticipated increase in the cost of capital and potentially substantive tax consequences were sufficient for many to reconsider the deals currently in process.”

The slowdown will likely be modest and many transactions will simply be delayed rather than canceled, “but the final outcome could take several months to evolve,” Marcus & Millichap said.