Green shoots or are we in the new normal?

The market appears to be showing increased activity this year compared to last. We are seeing a higher volume of Letters of Intent (LOIs) being written by our clients with 3-4 being submitted weekly, and the pricing gap between buyers and sellers has narrowed dramatically as we all adjust to the new normal rate environment. Deals that are being publicly marketed are closing more frequently, unlike the previous year when many failed to sell.

Tellingly, our firm has been engaged in several "best and final" negotiations with our clients and we have already closed four times the transaction volume compared to last year this time. Moreover, our pipeline of opportunities remains robust and growing. We are not out of the woods yet, but signs of green shoots are beginning to appear after 2023, which was by far the worst year on record with transactions down close to 70% from the peak.

Several factors contribute to this trend:

1. Many groups, having been on the sidelines for the past two years, are now eager to deploy their capital and there is a substantial amount of dry powder available for investment.

2. Sellers have adjusted their pricing expectations to more realistic levels as they now realize this interest rate environment will not dissipate quickly.

3. Some groups are compelled to sell distressed assets due to loan maturities or low coverage ratios, where principals have been covering shortfalls. This situation often results in deferred capital expenditures as tight cash flows diminish reserves further exasperating the situation.

We observe that this trend is gaining momentum as 2024 progresses and anticipate further growth throughout the year. Should the Federal Reserve implement 2-3 rate cuts towards the end of the year as many are predicting then we expect a significant increase in transaction volumes in 2025, as groups re-enter the market and as more distress bubbles up to the surface. While we may not witness the fervor of 2021 and 2022 again in our lifetimes, a normalization of the market appears to be on the horizon.