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Four years into the interest rate reset, buyers have reached a tipping point. The question is how long it will take sellers to get religion.
Something has changed in the commercial real estate market over the past 30 days, and it's becoming increasingly difficult to ignore.
Buyers have had enough.
For more than four years, the industry has been wrestling with the disconnect between the cost of capital and seller expectations. Interest rates began climbing in the second quarter of 2022, yet a surprising number of property owners continue to believe their real estate is worth what it was in 2020 or 2021.
It isn't.
What we're seeing now is a noticeable shift in buyer sentiment. Buyers are becoming increasingly vocal, and considerably more adamant, that pricing needs to adjust to reflect the realities of today's capital markets. This is happening across asset classes, and the message is becoming remarkably consistent.
The numbers just don’t work.
We're hearing more stories of financing falling apart, buyers demanding sizable price reductions during escrow, and transactions dying altogether because buyers are simply walking away.
Frankly, the buyers are right.
I've been in commercial real estate for nearly three decades and have worked through multiple market cycles. One thing has remained remarkably consistent.
When the market is moving up, sellers adjust their expectations faster than buyers. When the market is moving down, buyers adjust their expectations faster than sellers.
It happens every time.
When cap rates are compressing and values are rising, sellers are quick to recognize the opportunity. They raise their asking prices, often before comparable sales justify the increase. Buyers, meanwhile, are still trying to make sense of the new pricing environment.
When the market moves in the opposite direction, the roles reverse.
Buyers recognize the changing economics almost immediately. Higher borrowing costs reduce purchasing power, impact cash flow, and change the returns investors can reasonably expect. Sellers, however, remain anchored to valuations established under entirely different market conditions.
It's human nature. Nobody wants to believe their property is worth less than it was a few years ago.
Unfortunately, the market doesn't care what someone paid for a property or what they could have sold it for in 2021.
The market determines value, and the market has moved.
What's particularly interesting about the current environment is how long it has taken for buyer sentiment to reach this point.
The Federal Reserve began raising rates in March 2022. Since then, we've experienced more than four years of changing borrowing costs, tighter lending standards, and increasingly challenging transaction economics.
For much of that period, the market operated in a state of prolonged disagreement. Sellers resisted reducing prices, buyers resisted accepting lower returns, and transaction activity suffered as a result.
Deals still happened, of course. They always do. But the bid-ask spread kept a tremendous amount of potential transaction volume on the sidelines.
Now, there appears to be a growing consensus among buyers that the adjustment is overdue. They're becoming less willing to stretch to bridge the gap.
The important distinction is that this isn't necessarily a sudden deterioration in the underlying quality of commercial real estate. A well-located property with strong tenants and long-term leases can still be an excellent investment.
The issue is price.
A great property can be a terrible investment at the wrong price. Conversely, a property with challenges can represent an outstanding opportunity when purchased at the right basis.
That has always been true, but the cost of capital is forcing buyers to be considerably more disciplined about it.
There's another conversation I've been hearing more frequently, and it concerns people leaving the commercial real estate business because times are tough.
My response?
Good luck finding a business where times are always easy.
Every downturn brings a wave of people questioning whether they want to continue in brokerage. Transaction volume declines, commissions become harder to earn, and the business suddenly requires considerably more effort than it did when money was cheap and deals were plentiful.
I understand the frustration. I've lived through it more than once.
But I would argue that this is one of the best times to enter commercial real estate, and an even better time for existing brokers to double down on building their careers.
The habits developed during difficult markets are the habits that sustain careers for decades.
When transactions are easy to come by, it's possible to make a very good living without becoming particularly good at the business. A rising market can make an average broker look exceptional.
Difficult markets have a way of highlighting the difference.
They force brokers to prospect consistently, understand the capital markets, develop relationships, learn how to solve complicated problems, and become genuinely valuable to their clients.
They also create opportunities that simply don't exist when everyone is making money.
Consider the broker who can clearly help an owner understand why yesterday's valuation no longer applies, explain the current market dynamics and why and how there is an opportunity to sell and move many rungs up the ladder with a subsequent purchase, identify the right buyers, structure a transaction around challenging financing conditions, find the better upleg opportunity (most important), and ultimately get both deals closed.
That's real value.
That's how lasting client relationships are built.
The brokers who establish discipline, consistency, and strong prospecting habits in this environment will be exceptionally well positioned when transaction activity eventually accelerates.
It will accelerate. It always does.
The people who survive difficult markets don't simply benefit from the recovery. They enter it with stronger relationships, better skills, and considerably less competition.
There's another lesson I learned during the Great Financial Crisis that has stayed with me ever since.
When the market gets difficult, there's a natural tendency for brokers to abandon what they know and chase whatever everyone else believes is the next big opportunity.
I watched it happen in 2009 and 2010.
At the time, seemingly everyone in commercial real estate was chasing bank-owned properties, commonly referred to as REOs. The thinking was that the market would repeat what happened during the real estate downturn of the early 1990s, when banks took back enormous amounts of real estate and subsequently liquidated those assets.
People were convinced another wave of REO sales was coming. Brokers repositioned their businesses to pursue bank assignments, and investors raised substantial amounts of capital in anticipation of buying distressed properties at significant discounts.
There was just one problem.
The anticipated wave of individual property sales never materialized at the scale everyone expected.
Rather than foreclosing on thousands of properties and selling them individually, lenders increasingly found ways to dispose of troubled loans through bulk debt sales and other transactions. Some investment funds that had raised significant capital to pursue REOs struggled to deploy it.
Meanwhile, I watched brokers, including people working for me at the time, begin gravitating toward this supposedly enormous opportunity.
It didn't take long for me to recognize that much of the pursuit was fool's gold.
I called a meeting with our team and made my position clear.
"F*%k what everyone says about the market. We make the market."
We weren't going to abandon our expertise to chase the same opportunities everyone else was pursuing. We were going to double down on what we knew better than anyone else: best-in-class single-tenant retail properties.
That's exactly what we did.
As it turned out, the decision was prescient.
While much of the commercial real estate industry was struggling, high-quality single-tenant net lease retail became one of the most sought-after investment categories in the market. Investors were attracted to the relative security of long-term leases, predictable income, strong tenant credit, and the liquidity of the asset class.
Demand increased, cap rates compressed, and values actually rose significantly, even as other segments of the market continued to struggle.
We didn't need to reinvent our business. We needed to execute our existing business better than the competition.
I've never forgotten that lesson.
There will always be a new trend, a supposedly overlooked opportunity, or some emerging niche that everyone suddenly believes is the place to make money.
That doesn't mean you should ignore changes in the market or refuse to evolve. Quite the opposite. You need to understand what's happening around you and adapt your approach accordingly.
But there's tremendous value in developing genuine expertise and having the conviction to stay focused when everyone else is running in a different direction.
Know your market. Know your product. Know your clients. And when conditions get difficult, become even better at all three.
The opportunities are there. You just have to be willing to go find them.
One of the first things people tend to do when revenue slows is start cutting expenses.
Some of that is prudent. Every business should regularly evaluate its costs.
But there's a meaningful difference between eliminating unnecessary expenses and cutting the very resources that help generate revenue.
In brokerage, your ability to identify opportunities, reach property owners, understand the market, and get in front of clients is directly related to your ability to make money.
This is precisely why we built DealGround.
I recognize that I'm biased here, but I also believe the economics are difficult to dispute.
For a relatively modest annual investment, DealGround gives brokers access to property research, ownership information, a massive historical OM library, prospecting tools, and market intelligence designed to help them identify and pursue more opportunities.
If the platform helps a broker uncover and close just one additional transaction, the return on that investment could easily be 50 to 100 times its annual cost, or considerably more.
Think about that for a moment.
In a market where every transaction requires more effort, more research, more data, and more persistence, why would anyone willingly put themselves at a competitive disadvantage to save a few hundred dollars?
I believe DealGround should be open in the browser of every serious commercial real estate broker, every day.
Of course, I'm going to advocate for our product. But the larger point applies regardless of which tools you use.
Invest in the resources that make you more productive, more informed, and more valuable to your clients.
The brokers who emerge strongest from this cycle won't necessarily be the ones who cut the most expenses. They'll be the ones who continued investing in their businesses while their competitors were pulling back.
The commercial real estate market is going through an adjustment that has been a long time coming.
Buyers are increasingly unwilling to accept pricing that doesn't reflect the cost of capital. Sellers will eventually adjust, although history suggests that process will take longer than buyers would prefer.
In the meantime, transactions will continue to be challenging, and some deals simply won't get done.
For brokers, the question is how they choose to respond.
You can spend your time complaining about the market, waiting for interest rates to fall, and hoping transaction volume returns to previous levels.
Or you can recognize that this environment presents an opportunity to become significantly better at your profession.
Prospect more. Learn more. Build relationships. Understand the market dynamics. Invest in your business. Find opportunities that others are overlooking.
Most importantly, demonstrate to your clients why they are better off working with you than with the competition.
The market doesn't owe any of us a living. But it continues to offer tremendous opportunities to those willing to do the work.
Personally, I can't think of a better time to be in commercial real estate.
