Despite decline, industry remains hopeful for a better second half of the year.
Green Street, a commercial real estate intelligence and analytics provider, recently released its report, Property Insights: Quarterly Transaction Trends, which revealed second-quarter transaction volume dropped 50 percent from the same time frame in 2022. Volume remained flat sequentially, however.
“Broader macro conditions are not supportive of CRE transactions right now,” said Green Street Managing Director, Co-Head of Strategic Research and report co-author Daniel Ismail. “The decline remains fairly broad-based, as no markets appear to have avoided material slowdown in transaction activity.
“The office sector has shown the most pronounced drops – particularly in markets like Houston, New York, and Atlanta – relative to estimated market value, while apartments and strip centers stand out with steep year-over-year volume declines.”
The report’s other key takeaways included year-to-date transaction volumes are closer to longer-term averages, but significantly lower than 2022’s pace. Meanwhile, CRE deal value is about 1 percent of total market value in certain sectors through the first half of 2023. All major CRE markets have seen a fall so far this year, with a few discernable trends among various areas.
Additionally, the report noted that average sales prices are up, suggesting that higher quality CRE properties are more likely to sell. Green Street noted this is an imperfect metric, however.
“Higher quality properties appear to be garnering more attention as the average sales price (per square foot or unit) has been higher thus far year-over-year,” the report said. “However, these metrics are heavily skewed by the amount of transactions and the geography of closed deals, which muddies readthrough for asset values. Green Street’s CPPI suggests commercial real estate values are down 16 percent from the recent peak in 2022, which is a more accurate measure of spot prices.”
Office sector continues to struggle
Of the various CRE sectors, office properties saw the most pronounced transaction decreases, according to Green Street. The Houston, New York and Atlanta markets saw some of the biggest drops, per the report. The office sector wasn’t alone, however. Malls, industrial properties, lodging, healthcare and strip centers all saw their quarterly sales volume fall compared to the second quarter of 2022.
“Similar factors, namely the cost and availability of financing coupled with wide bid-ask spreads, are impacting deals across all sectors,” the report said.
Transactional activity declines were apparent by market, not just sector, according to the report. Major metro areas such as New York, Boston, Chicago, Los Angeles, Philadelphia and Washington, D.C., all saw significant dips in transactions from the second quarter of 2022 to the same timeframe this year.
“Regardless of local real estate dynamics, no markets appear to have avoided the material slowdown in transaction activity,” the report said.
Reason for optimism for CRE
Green Street’s report didn’t paint the brightest picture for CRE during the first half of 2023, but some recent transactions have given the industry hope for the latter half of the year.
For example, the report noted that SL Green announced it sold a large partial interest (49.9 percent) of a Midtown NYC office building to a U.S. affiliate of Mori Trust, a Tokyo-based investment company. It’s the biggest office deal so far this year and was well received in terms of public market reaction in office REIT share prices.
“While office values as measured by Green Street’s CPPI are down (approximately) 30 percent since the 2022 peak, the 245 Park deal provides a glimmer of hope for the values of high-quality office properties,” report said.
Meanwhile, Prologis and Blackstone announced late in the second quarter of 2023 a $3.1 billion, 14 million square foot industrial portfolio deal, with properties spread across the U.S.
“While industrial transaction volume was down 60 percent in the second quarter, the deal between the industrial titans provides a good ‘comp’ for industrial real estate given the size and scope of the deal,” Green Street said.
Publicly traded CRE services companies shared similar sentiments about CRE’s future, according to the report. There’s a slowdown across the board, but hope remains that industry activity will pick up during the second half of 2023 as buyers and sellers, “acquiesce to a new reality.”
“We are beginning to see an uptick in investor appetite for industrial assets where buyers will accept modest negative leverage due to the significant embedded rent gains over the past several years,” CBRE said on an earnings call. “In U.S. multifamily, CBRE currently has $18 billion of deals in the market, more than double our volumes sold in the first half of the year.”