CRE Transactions Have Crashed 70% Year Over Year

A new Green Street report by managing director Daniel Ismail and analyst Harsh Hemnani digs into commercial real estate transactions of $5 million or more. As a “critical metric of CRE health and overall liquidity,” the deal activity is bad news, only $37 billion, down a “stunning” 70% year over year, based on the analysis of information in the firm’s sales comp database.

This is more than a comparison between a slowed period and a previous historical record. Q1 saw a figure lower than the 10-year average transaction pace. If quadrupled for an annualized result, the $148 billion would be lower than every other year since at least 2013.

Even worse, the plummet isn’t something explained away with a simple, “Oh, you know, office” comment for the sector down 79%. As the report noted, this drop included those darlings of pandemic performance, multifamily (dropped 83%) and industrial (off 69%) that once shown so brightly. Strip centers had a deal loss of 59%, with healthcare (-42%), malls (-27%), and lodging (-26%) following behind. The only sector that saw any gain was net least: up 2%.

The results also weren’t a pure product of geography. “There appears to be little difference between volume declines in coastal markets and those in the Sun Belt,” they wrote. “Trends may emerge as the year progresses, but at the moment no market appears to have avoided the slowdown.”

Part of the drop is the lagged correlation between property prices and transactions. “Transaction volumes tend to be robust as prices increase and tend to slow down dramatically when buyers and sellers reach a stalemate in front of (rapidly) declining property values,” they wrote. Los Angeles transactions may have been off by 49% and New York City, by half, but Houston (-98%), Dallas/Fort-Worth (-95%), and Atlanta (-86%) took even more of a hammering.

Then there’s trying to understand property values. Closed transactions have seen many average sale prices per square foot (per unit for multifamily and lodging) up: lodgings, 56%; strip center, 33%; office, 20%; industrial, 17%; life science, 15%; mall, 9%. Healthcare is flat. Self-storage and multifamily are down 4% and 9% respectively. And yet, Green Street’s CPPI (commercial property price index) suggests that average property values are off by 15%. “This suggests quality assets are trading with more ease, which would be consistent with a more constrained debt market,” the report says. “Higher interest rates, shaky commercial real estate valuations, a slower economy, and the collapse of several regional banks are all impacting the availability of debt.” There’s “less overall debt capital in circulation with banks reducing their loan books in March and April.”

There is also a lot of built-up capital sitting for when sellers finally “adjust their expectations.”