In a Switch, Large Property Sales Outperform Smaller Deals

There’s evidence of some reversal in a pattern of property sales based on size from the middle of 2023.

Similar to the value-weighted and equal-weighted, smaller properties did better in the long run. Investment grade was down 3.4% over the 12 months while the commercial grade was up 6.2%. There is no explanation or speculation on why smaller properties have been doing better. Perhaps it was a result of rising interest rates and price differentials. When financing is more expensive, a less costly property might make a project viable.

In a new Real Estate Alert, Green Street wrote that in the first half of 2024, small property sales growth didn’t hold up as well as large institutional offerings. From January to June, properties in the $5 million to $25 million range fell 10.7% from $44.32 billion in the first half of 2023 to $39.58 billion in the first half of this year, according to the firm’s sales comps database.

Compare that to properties in the $25 million and higher category, where sales activity was down only by 8.6%. It’s the first time since the full year of 2021 that larger properties outperformed the less expensive category.

Green Street said there were a few reasons for the reversal: fewer distressed deals in the small-property space, increased focus by private investors buying more expensive properties while institutions wait out volatility and two giant apartment trades.

Kevin Aussef, president of investment properties in the Americas for CBRE, told Green Street that one reason for the lack of activity among smaller properties is less distress. Many private clients weren’t typically late-cycle buyers and they weren’t typically leveraged with mezzanine debt.

Or maybe there might have been greater opportunities for distressed purchases among larger properties. Over the last year and a half, there have been many major CRE players and analysts discussing the fall of office valuation. And yet, there hadn’t been that many large buildings selling at big losses. But that type of sale is important to finding a bottom.

“Usually that’s the sign that things are about as bad as they’re going to get. When people finally throw in the towel,” Matt Reidy, director of economic research at Moody’s, told GlobeSt.com. “We haven’t seen much of that in the larger transaction space until this most recent quarter. We didn’t see owners selling properties at really large dollar losses, like $100 million from when the property was acquired.”