How This Expert Is Viewing the Big Drop in CRE Sales

As startling as the year-over-year drop in commercial real estate deal volume in the first half of the year has been, Marcus & Millichap points out that the declines are not far off from long-term averages.

This data also shows that it’s mostly affected properties worth $20 million or more, according to John Chang, Senior Vice President, National Director, Research and Advisory Services, Marcus & Millichap.

The estimated total dollar volume of $1 million plus commercial property sales in the first half of 2023 is down nearly 53% from the first half of last year, Marcus & Millichap reported.

“That is an astonishing number, reminiscent of the global financial crisis and the pandemic,” Chang said.

“But of course, the headlines don’t tell the full story.”

Property prices were at or near their peak in the first half of 2022 and they have since come down some.

He said that if the number of high-priced property sales changes, it can have an outsized effect.

For example, when comparing sales in the first half of 2023 with the first half of last year, the total dollar volume of properties over $20 million was down almost 60%.

Meanwhile, the total dollar volume of small property sales between $1 and $10 million was down by 40%.

Rather than measuring the commercial real estate market in dollars, Chang prefers to measure it by transaction count.

Using this measurement, the total estimated commercial real estate transaction count over $1 million in the first half of 2023 was down by 41% compared to last year.

The hardest hit segment is still the $20+ million price tranche with deal activity down 56% while the $1 million to $10 million tranche was down by about 39%.

In between, the sales of $10 million to $20 million properties were down by about 50%.

Chang said these numbers are forecasted because he does not yet have a complete compilation of the commercial real estate transactions from Q2.

“We also need to consider that the first half of last year was by far the most active half on record, with nearly 50,000 commercial real estate transactions over $1 million,” Chang added.

“To put that in perspective, the 10-year average number of transactions over $1 million from 2012 through 2021 was about 30,000 per year, which happens to be roughly in alignment with our estimate for the first half of 2023.

“Even though the drop in activity when comparing this year versus last year was dramatic, when you look at the long-term trends, the first half of 2023 was about on par with a longer-term average.”

The composition of those sales changed, Chang said.

Apartment transactions were 17% below average in 2023 with smaller transactions between $1 million and $10 million down 19.4% from average.

And while the $20 million plus apartment transaction activity was only 5% below average, it took a disproportionately large hit compared to 2022, down over 60%, Marcus & Millichap reported.

Comparatively, the total number of office transactions over $1 million was just 9.5% below average with the one to $10 million segment off by just 0.6% and the $20 million-plus tranche down by nearly 48%.

Furthermore, small office buildings, particularly in the suburbs and in smaller markets, weren’t hit nearly as hard as the headlines suggest, according to Chang.

Some sectors even outperformed their long-term averages, Chang said.

Retail property sales were down by 38.5% compared to last year, yet they were still 7% above the long-term average. The $20 million plus large property segment of retail was just 3.5% below the average.

And then industrial, which was down 36.5% compared to last year, was 10% above the 10-year average.

That said, the $20 million plus industrial tranche was down nearly 50% from last year, even though it was 30% above the long-term average.

Given all of that, Chang said commercial real estate sales activity is down significantly as the rapid rise of interest rates and economic uncertainty took a toll.

“But the slowdown is a bit overstated by the media because they mostly cite dollar volume stats,” Chang said. “The slowdown is disproportionately in the $20 million plus segment dominated by institutional investors. While private investor activity was down, it performed better.”

Private investors now constitute more than 61% of the total buyer pool, and that number is per Real Capital Analytics, which only tracks deals above $2.5 million.

“Presumably, almost all the deals between $1 million and $2.5 million are being done by private investors, so the private investors’ share is upwards of 80% of the transactions,” Chang said.

For sellers, that means the most likely buyer candidates will be private investors, he said, and a significant portion of the REITs and institutions are still on the sidelines.

“For buyers, that means competition for assets remains less intense than it was historically, especially for larger assets,” Chang noted.

“I believe the market has already started the price discovery process, and the expectation gap between buyers and sellers could begin to narrow later this year.

“As I’ve highlighted in past videos, times of uncertainty like this often bring some of the best investment opportunities.”