CRE Asset Sales Still Continue, Despite Slumping Valuations

Sales of commercial real estate assets are likely to continue at a robust clip, despite decreasing valuations, led by the multifamily, industrial, and retail sectors. 

That’s according to the latest Q2 research from Crexi, which shows that the average price per square foot across the firm’s platform rose more than 10% in the second quarter of the year, the third consecutive quarter of pricing increases since Q3 2021 and a 15.6% jump in property values since last year.  Searches experienced a 167% uptick year-over-year for for-lease space and “showed no signs of slowing, even amid economic uncertainty,” the firm notes in a report discussing the data. 

The number of unpriced listings also rose, reflecting what Crexi analysts call “an overall market pause” related to rising interest rates and capital costs. costs. Around 14% of new listings were unpriced in Q2, compared to 13.75% the previous quarter and 13.4% the last year.

“We’re likely to see continued robust trading, albeit at a slower clip than previous quarters, thanks to transactions driven by multifamily, industrial, and the recovered retail sector,” analysts say. “Long-term investors and non-trading REITs will likely continue to deploy capital along flight-to-quality strategies and underwrite their investments with the assumption that rates and inflation will continue for a while longer.”

Crexi analysts also note that many sellers are listing assets to get ahead of buyers before the cost of capital becomes “prohibitive,” which is causing valuations to slump.  Institutional-grade investors have thus far been undeterred by current rate hikes, but brokers are “urging their clients to hit the market sooner rather than later.”

Cap rates for new listings hit 5.83% on average in the second quarter, five basis points above Q1 but 50 bps down from 6.13% year-over-year. Crexi analysts say cap rates may rise in the coming market, especially if rising interest rates lessen demand.

The cities with the highest cap rates for new listings in Q2 were Milwaukee, Hartford, Providence, Cleveland, and Kansas City.

And while individual buyer activity dropped by 5.25%, “real estate has proven itself,” the report states. “Industrial, multifamily, retail, and office asset classes weathered the worst of the pandemic storm and are recovering, making CRE’s overall resilience worthy of more consideration. Q2 slowdowns and sentiment changes have not deviated valuations and buyer activity from all-time high performance, and commercial real estate is a long-game play.”