Buyers and Sellers Are Not Blinking On Pricing
April 2021 investment activity was 18% below pre-pandemic numbers.
Deal volume for the industrial and multifamily sectors may be performing well as the pandemic begins to resolve, but investment activity remains well below pre-COVID levels for all other asset classes.
A new analysis from Real Capital Analytics reveals that potential buyers are still wary about the pace of the economic recovery, and owners are “generally hesitant to sell at prices that would provide enough of a discount to address the buyer caution.”
“Until one of these groups blinks, deal volume is likely to remain muted,” RCA’s Jim Costello notes.
The positive signs are out there, of course: commercial property sales were up 66% year-over-year in April, according to RCA data, showing deal activity is indeed climbing. The market “rarely grows that quickly,” according to Costello, “but the aberration here is not about deal volume in 2021; rather, it is a story about the pace of sales in 2020.”
“A year ago, we were on the precipice of the unknown,” Costello says. “The global economy froze as workers were sent home; commercial property deal volume cratered as investors were hesitant and the mechanics of completing deals faced challenges. Over the coming few months, year-over-year comparisons will be problematic as an indicator of market health because of this base for comparison. Looking instead at the level of deal activity relative to trends before the pandemic can paint a clearer picture about the state of the market.”
RCA data shows that total commercial real estate investment averaged $34.4 billion for April of every year from 2015 to 2019, putting April 2021 activity 18% below pre-pandemic numbers. Activity in the industrial sector was 17% higher than prior averages, however, and apartment deal volume is basically back to pre-COVID levels.
Total CRE deal volume is expected to recover relatively quickly through 2023 ($590 billion versus $500 billion in 2021), and predictions for CMBS issuance is $70 billion in 2021, $85 billion in 2022 and $90 billion in 2023. But price growth as measured by the RCA Commercial Property Price Index will likely remain below 2020’s 5.2% for all three years, dropping to 4.2% in 2021 and increasing to 5% in 2022 and 5% in 2023.