What goes up must come down is a good description for investment sales activity in commercial real estate. The brakes finally hit in the second half of 2022, as trading volume in the last quarter was $131.1 billion, or 62.2% down from the end of 2021, according to Colliers. That varied by property type, with retail at the lower end down 55% to 84%
Forget low cap rates, as you can’t expect a return on 3% to 4% rates. Owners are generally holding tight and not selling unless they have a capital event. Interested buyers are looking for discounts.
Distress may emerge in parts of multifamily because of the financial structure of deals with higher interest rates combined with a development wave that should push down rental prices. Quarterly volume in Q4 was down $50.4 billion.
Office quarterly volume was down $19.6 billion, or 65%. That’s the weakest fourth quarter since the global financial crisis. There is a real flight to quality, but owners are typically opting to hold. Sale-leaseback may provide a liquidity option. Fundamentals have held steady; unfortunately, that means negative absorption rate and average occupiers reducing their footprint by 20%. Office-to-residential conversions may be an option for some, but many properties are not structured for that type of rework.
Industrial volume was down $33.2 billion, or 58% year over year. Investors still see industrial as a safe harbor and are looking for last mile or big-box distribution capabilities. Tailwinds include e-commerce and third-party logistics demand, limited availability, and increasing rents. However, there is a large wave of new supply on its way, which could affect dynamics. Rising cap rates and construction deliveries will have impact on the market.
Retail was an outlier, with volume of $85.7 billion up 4% over 2021. But fourth quarter numbers were down 57% or $16.2 billion given overall CRE industry pressures. Grocery anchor retail locations were the big favorite and look to remain so in 2023. Urban, or high street, retail fell off this year. Retail fundamentals are strong and consumers have continued to buy, but inflation is taking a toll and it’s unclear how long consumer discretionary purchases will continue. If inflation can continue to slow, that could be a positive factor going forward.
Hospitality volume was relatively flat compared to 2021, largely because of the short-term nature of stays and rates means a potential hedge against inflation. But the investment volume was largely in the first have of the year; in the fourth quarter, transaction volume dropped by 34%. A 7.2% gain by limited-service properties helped enable a price surge in the category. But pricing cooled at the end of the year, a trend that seems like it could extend into 2023.