Growing interest rates, turning into rising costs of capital, have slowed investment activity across the commercial real estate spectrum, CBRE recently wrote. But the rain of pain hasn’t fallen on the great and small alike. Instead, it has generally struck the biggest, not the smallest.
Various MSCI reports over the last two years have remarked on how transaction volumes of smaller deals have been hit less than those of larger deals. CBRE analyzed the MSCI Real Capital Analytics database of trades by quartile, saying that it helped determine “property value declines on top-tier pricing.”
The differences were highly dependent on property type and were calculated as a change in 2024 annualized sales volume compared to volume in 2021.
Industrial saw the flattest response. The upper quarter of deal pricing saw only a 730-basis-point increased loss compared to the lowest quartile. In multifamily, the difference was larger at 910 basis points but it was the second largest quartile that felt the most impact.
Retail on the other hand looked a bit loopy. The second-to-lowest quartile had the most loss. The next hardest hit was the lowest quartile. Third was the second-to-the-top and the best-performing comprised the highest-value trades.
Office saw a 1,500-basis-point difference, with the deal volume of the largest properties hurt most. CBRE remarked that there was a market-driven aspect to this. It was harder to raise money for the largest office buildings, so many investors preferred smaller, lower-leveraged deals. Also, smaller businesses have succeeded to a greater degree in keeping employees working in the office.
In August, Moody’s made a similar but different argument about the office market, that it might have been nearing bottom, particularly because of the problems in larger deals. Over the last year and a half, many major CRE players and analysts have discussed 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, a director of economic research at Moody’s, told GlobeSt.com in August. “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.”