New office space at the Corbin District mixed-use redevelopment in downtown Darien has attracted significant preleasing as construction of the One Market building begins. Image courtesy of Baywater Properties

Commercial real estate investors are coming to grips with the higher-interest rate environment and what it means for property values.

Federal Reserve rate hikes disrupted the multifamily investment sales market in 2023, prompting deals to be canceled amid lending environment volatility. Multifamily transactions fell 70 percent nationwide in 2023, according to a recent report by researchers Yardi Matrix, because of falling values and rate volatility.

Investors and lenders largely shied away from office deals, wary of further declines in occupancy and rents, but are now nearing a consensus on property values in the post-pandemic workplace environment.

“They’ve seen peak-to-trough where values will shake out, and they’ve now been able to price in what the worst-case scenario looks like and can bid accordingly,” said Stephen Shapiro, suburban market leader for Colliers’ Tri-State region.

Office occupancy stabilized in the fourth quarter, according to data released this month by CBRE.

The Fairfield County availability rate ended the year at 26.2 percent, down from 27.3 percent at the end of 2022.

The market, which spans 40.4 million square feet, recorded 481,000 square feet of positive absorption in 2023.

In a defining trait of the post-pandemic leasing environment, 80 percent of 2023’s deals were struck in class A properties, totaling 1.2 million square feet.

In Fairfield County, office leasing demand in the post-COVID environment is driven more by building quality and amenities than location, Shapiro said.

“The growth tenants are looking for highly-amenitized, class A space. Geography is a little less important than the amenity base and the physical features,” Colliers’ Shapiro said.

Multifamily housing conversions will remain an attractive option for some landlords, particularly of functionally obsolete office buildings, he said.

Multifamily Buyer Pools Shrink

Throughout Connecticut, interest rate volatility in early fall spooked investors and scuttled transaction activity in the multifamily sector.

Brad Balletto, managing director of investments for Shelton-based brokerage Northeast Private Client Group, said his firm’s transactions declined 25 percent on a dollar basis from 2023 to 2024.

While interest rates have depressed deal activity, rents have remained stable because of Connecticut’s limited pipeline of new construction, warding off a supply glut.

“You don’t get the violent ups-and-downs in rents and new supply that you do in the growth markets, such as the Southeast and Southwest,” Balletto said.

Many apartment landlords without expiring mortgages are putting off decisions on whether to place properties on the market, Colliers’ Shapiro said. The Federal Reserve indicated this month it will cut interest rates three times during 2024, which could translate into higher future asset prices.

While buyer pools for specific transactions have shrunk in the past year, there is still active demand from the typical sources such as family offices and small private equity groups looking for multifamily investments, Balletto said. He forecasts rent growth of 3 percent in 2024 and an uptick in transaction activity.

“You’re not going to see double-digit rent growth, but there’s [limited] new supply so I expect low single-digit rent growth,” he said. “From a transaction perspective, we bottomed in Q4 and we’re probably halfway through this whole reset.”