Despite significant interest rate hikes to tackle inflation, commercial real estate investment volume in H1 2022 topped that of other recent late-cycle years. However, as BBB corporate bond yields doubled and, in some markets, rose above cap rates, investors became more cautious and investment volume began to slow in August.

Figure 1 illustrates how investment volume has tracked corporate bond yields in several key years. The solid line shows borrowing costs and cumulative investment volume through August 5 for each year, while the dotted line shows investment performance for the rest of each year.

2007 and 2019 were typical late-stage real estate cycle years as internal rate of return expectations fell; however, 2019 benefited from more institutional capital allocated to real estate and falling interest rates during much of that year. 2020 was an atypical year as the Covid pandemic triggered capital markets dislocation, severely limiting investment activity.

By 2021 the combination of steady, ultra-low rates and robust investor demand for industrial and multifamily assets drove investment volume to a record level.

Today, conditions are mixed. Inflation may have peaked but won’t soon return to the Fed’s 2% target. Thus, the Fed is expected to continue raising interest rates this year. Despite uncertainty about the trajectory of inflation, strong real estate fundamentals and high levels of investor dry powder make conditions conducive to continued robust investment activity.