The commercial real estate (CRE) market is facing its most significant slowdown in over a decade, with transaction counts plummeting to levels not seen since 2011, according to a recent Altus Group report. This decline has raised questions among investors about whether the market has truly hit bottom or if further challenges lie ahead.
Market Overview: The Decline Across Metrics
The numbers paint a challenging picture. Between the second and third quarters of 2024, CRE transactions dropped by 10% in deal count, 6.6% in dollar volume, and 3.8% by square footage. When compared year-over-year, the declines are even steeper, with a 9.9% drop in transaction count, a 9.6% fall in dollar volume, and an 11.4% reduction in square footage.
These declines span across major CRE sectors, including multifamily, industrial, office, retail, hospitality, and mixed-use properties. Multifamily properties saw the sharpest quarterly drop, with a 12.3% decline in transaction count and a 5.4% decrease in dollar volume. Office properties, surprisingly, showed a 15.5% quarterly increase in dollar volume, but this sector still saw a year-over-year decline in transaction count of 15.4%.
Hospitality emerged as the outlier, with a 9.2% increase in transaction count and a 27.6% rise in square footage between Q2 and Q3, despite falling in dollar value. Yet, even hospitality’s year-over-year metrics show declines in most categories.
The overall transaction activity through the first nine months of 2024 is now at its lowest level since 2011, a stark reminder of the post-Great Recession era, when CRE markets were still reeling from the global financial crisis.
What’s Driving the Decline?
The steep drop in activity is largely attributed to a combination of macroeconomic and market-specific factors. Rising interest rates have continued to erode borrowing capacity and increase the cost of capital, discouraging many investors from pursuing acquisitions. Banks and other lenders have tightened underwriting standards, further restricting access to financing.
Moreover, uncertainty around property valuations has created a stalemate between buyers and sellers. Many sellers remain reluctant to lower asking prices despite higher cap rates and softer market conditions, leading to a lack of alignment on deal terms.
Sector-specific challenges are also contributing. In multifamily, for example, rapid rent growth in prior years has slowed, and many markets are now dealing with elevated levels of new supply. In the office sector, the long-term impact of remote and hybrid work continues to weigh on demand and valuations.
Is the Market Nearing a Bottom?
Despite the negative data, many industry forecasts suggest the CRE market may be approaching a bottom. Analysts point to signs of stabilization, such as a 1.2% quarterly increase in all-sector average price per square foot. Furthermore, office properties showed unexpected resilience, with dollar volume and square footage both up year-over-year.
This apparent resilience has sparked optimism that now could be the right time for opportunistic investors to enter the market. Some sectors, particularly industrial and multifamily, are expected to bounce back quickly as demand fundamentals remain strong. However, the question remains: how much further might the market slide before reaching true stabilization?
What This Means for Investors
For investors, the current CRE landscape offers both challenges and opportunities. On one hand, the slowdown in transactions reflects significant uncertainty, suggesting that caution is warranted. A further dip in valuations could hurt investors who move too aggressively.
On the other hand, the current environment also presents opportunities for those with a long-term outlook. Distressed properties or motivated sellers may offer the chance to acquire assets at discounted prices, particularly in sectors like multifamily and industrial, where demand fundamentals remain solid.
Investors should also consider the resilience of specific submarkets. The Altus Group report highlights hospitality and office as sectors showing relative strength in certain metrics, which could indicate early signs of recovery.
The Path Forward: Navigating the Risks
Investors must navigate this environment with a balanced strategy. Rigorous underwriting and a focus on high-quality assets in strong locations will be critical. Additionally, understanding local market dynamics, such as population growth, job creation, and new supply pipelines, will help identify the most promising opportunities.
Liquidity and flexibility will be key. With lending conditions still tight, investors should seek to structure deals conservatively, ensuring they have sufficient reserves to weather potential disruptions.
Cautious Optimism Amid Uncertainty
The CRE market is undoubtedly in a period of transition. While the data suggests the market hasn’t yet hit bottom, the slowdown presents a potential window for savvy investors willing to take calculated risks. By focusing on fundamentals and maintaining a long-term perspective, investors can position themselves to capitalize on opportunities as the market finds its footing.
Comments