Headline Deal Volume Drop Might Misrepresent Market Reality

England has a genius for maintaining steadiness, whether the “Keep Calm and Carry On” posters of the Second World War, or the catchphrase of author Douglas Adams in his “Hitchhiker’s Guide to the Galaxy”: Don’t Panic.

That may seem simplistic to CRE professionals in a time with abundant warnings of falling prices, collapsing transaction volumes, and the general difficulty of finding  financing with reasonable pricing and terms. But some sober and prudent sources that have traced some of the problems have begun warning to step back from the edge.

In a recent report on U.S. capital trends, MSCI made just this point. “Deal volume fell at double-digit rates in May, but the headline figures can overstate the severity of what is happening in the market,” they wrote. “The retreat in sales volume is not as bad as that experienced during periods of economic weakness in the recent past.”

They note that investment activity has fallen at a 40% pace or maybe more over the last seven months, with “year-over-year declines now outstrips the stretch of declines of this scale at the beginning of the pandemic.” Which adds some perspective as general conditions are nowhere near as dire, nor as uncertain. The fall in interest is as easily calculated as a term sheet that includes a large increase in interest rates.

Cap rates were up “for all major property sectors over the last year,” the report notes. Mostly in the 10 to 30 basis point range, although central business district offices saw jumps of almost 75 basis points. However, as fixed rates for 7-to-10-year mortgages were up 6.3% at the end of Q1, nearly 210 basis points higher from the previous year, financing rose faster than cap rates, making a lot of investments impossible.

But still, investment in May was higher than May 2020. “Volume was 36% higher this year than that previous low point for the market,” they wrote. “Relative to May of 2009 when financing was often unavailable at any price, deal volume closed some 370% higher in May of this year.”

Not only could things be worse, but they actually were a few years ago.

So, transactions are understandably down. On a year-to-date year-over-year comparison, multifamily is down 69%. Office, -65%. Then come hotels (-58%), industrial (-57%), development sites (-50%), retail (-43%), and senior housing and care (-34%).

But things came back after the depths of the pandemic. They did, grudgingly, after the global financial crisis. With much better sense of what could happen, they will again.