MSCI’s overall capital trends analysis for August 2023 is what active CRE professionals would probably expect, which is another indication of disappointment.
“A steady pace of annual declines in commercial property sales started in August of last year and continued into last month,” they wrote. “The sharpest declines started into Q4 2022 and there are few signs suggesting that investors will step in from the sidelines to drive sales back to the levels seen last year.”
But MSCI explicitly said that a purely negative view of the future is probably off-base, as there are some “hopeful signals.”
One is part of a point that GlobeSt.com has previously reported. On one hand, there is the question of whether the CRE market is hiding more distress than might be visible on the surface. The other part, as MSCI alluded to, is that it is easy to over emphasize market issues because of unrealistic baselines.
“Deal volume was at excessively high levels over much of 2021 and 2022 as low interest rates and investors hungry for any sort of yield drove sale activity to records in many months,” MSCI wrote. “High double-digit rates of decline in deal activity should be expected as the market moves away from those influences.”
In other words, it’s data chatter, with volatility swinging one way or the other and the statistical principle of reversion to the mean means that after a couple of years of elevated activity and valuations, chances are that data will trend downward, as it has.
“The sharpest declines in activity really started in November and December of last year,” MSCI wrote. “If the annual declines are just a function of the market adjusting to a new reality, then one might argue for an improvement in the growth of sales volume late in the fourth quarter of this year.
However, there have been additional “shocks,” including bank collapses early in 2023, which “led to the sharpest decline in activity by these smaller lenders since our comprehensive coverage of the lending market began in 2011.” Not only were the lenders important funding sources, but the event set off concern among banks and regulators. Ultimately, there was significant pull-back by lenders, which tightened lending standards and, in many cases, simply cut back the amount of lending they were willing to do.
“Commercial property prices fell in August, with the RCA CPPI National All-Property Index down 9.9% from a year earlier,” they wrote. “In a hopeful sign that conditions may be changing, much of that decline was front-loaded: the strongest monthly declines were in Q4 2022 and Q1 2023 as investors grappled with the impact of the changing interest rate environment. On an annualized basis, commercial property prices fell only 0.5% from July to August of this year.”