Recent CRE Trends Don’t Bode Well for 2024

Trends aren’t unbeatable statements of fate woven by the three Greek Moirai, or Fates. But the immediate past often gives some idea how things might go, at least for the near future. From that view, the end of 2023 was a major bummer, according to MSCI.

Typically, the fourth quarter of a year is the strongest for commercial real estate investment and, so, property sales. Investors often have capital at hand. They’ve looked at assets, considering the pros and cons. After the CRE conferences that happen in the fall, there’s a flurry of activity as deals finally get struck.

That didn’t seem to happen as 2023 closed. There were $89.5 billion in transactions, but that was the worst quarter of the year, not the best. The year-over-year change was -41%.

For major metros, the slide was 37%; non-major metros were down 42%. That represented 1,569 properties for the former and 4,697 for the latter. By property type, the biggest decline was for multifamily, at 50%. Industrials were down 43%; hotels, 42%; office off by 32%; retail by 31%; and development sites by 27%. Seniors housing and care bucked the trend with a 9% increase. The sector had been hit hard during the pandemic and went down while other property types raced upward. That has since reversed.

Part of the drops in 2023 Q4 was the comparison to 2022, which was a much stronger year, with 2021 being the big record setter because of low financing costs. And as things move away from those heady times, the transaction declines become more moderate. The good news is that the 41% drop could have been worse with the 59% plunge in the second quarter of 2023.

There were other factors as well, with property valuations and prices falling while cap rates rose. “Pricing has adjusted over the course of 2023, with cap rates on their way up,” MSCI wrote. “Our hedonic measure of cap rates was generally 50 to 60 bps higher for the major property sectors. Hotel cap rates were unchanged from 2022 but this market is a special case, having gone through a more painful situation at the start of the pandemic.”

Disconnected was how MSCI characterized 2023. Buyers and sellers had a hard time coming together, leaving bid-ask gaps wide and continuing a long stretch of poor price discovery. It would seem like things should improve in 2024, especially with expectations of Federal Reserve interest rate drops. But those seem unlikely until May at the earliest. Macroeconomics will do what it will and markets must be patient.