While it’s still up for debate what Jimi Hendrix was referring to in “Purple Haze,” it definitely was not the economic uncertainty real estate investors face today.

But that’s exactly where most investors find themselves — in a haze over what is going to happen next.

On one side, the fundamentals are strong for hotels, apartments, retail, medical office and industrial properties. Vacancies are low, demand is strong, and rental growth is off the charts. On the other hand, there is an inverted yield curve, inflation that is running at a four-decade high and a Federal Reserve that has turned from accommodative to antagonistic toward the economy.

The explosive cost of inflation that most developments are facing, combined with higher interest rates, has forced many developers to put their plans on hold in hopes of rents catching up to the new cost paradigm or costs coming down once all the supply chain/pandemic issues get ironed out. The problem? It’s rare to see costs fall.

Unfortunately for renters, rent spikes are more likely, which would allow overall returns to “catch up” and developers to justify moving forward on projects at higher cost levels.

Most lenders are moving toward a risk-off stance with a bias toward recession. What that means is they are lending less, pricing wider and becoming more strict.

According to the John B. Levy & company National Mortgage Survey, rates are in the 4.50% to 5% range for the most conservative 5- and 10-year loans and in the 5.25% to 5.75% range for more typical transactions. CMBS lenders are struggling with higher spreads and pricing deals into the 6% range.

The uncertainty causing lenders to be less aggressive is also impacting real estate in weird ways. Amazon, for instance, is pulling back on their binge absorption and even subleasing warehouse space. There is a ripple effect related to the loss of demand for construction products Amazon was pursuing. Now, there is more availability of steel, roofing materials and insulation for instance.

In the multifamily world, $46 billion of rental assistance was appropriated by Congress for distribution through local and state rental relief programs. Not all has been distributed, but the programs are running out of money.

In Virginia, over $745 million was distributed, but applications for additional rental relief were closed on May 15. In addition, Virginia had a moratorium on evictions that was lifted on June 30.

The combination of no rental relief and the eviction moratorium being lifted creates plenty of angst for tenants and unanswerable questions for landlords. Did government rental assistance contribute to the spike in rents over the past two years? If so, is it sustainable after the money dries up? Will tenants who were on the program be able to make monthly payments now?

The picture is hazy at best.

John B. Levy & Co. partner and investment banker Andrew Little can be reached at alittle@ jblevyco.com.

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