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U.S. commercial real estate deals contracted in February, though more so because of last year’s outliers than because of a troubled market.
CRE transaction volume fell to $30.3 billion in February, representing a 13 percent year-over-year decline, according to the latest capital trend report from research firm MSCI. However, volume is up 21 percent for the past 12 months.
The yearly drop is largely because of last year’s high level of entity-level sales, particularly in the hotel and retail sectors, the report noted (MSCI declined to specify the deals that contributed to last year’s outliers). As a result, entity-level sales plunged 87 percent year over year.
Also down this year were portfolio sales, which declined 21 percent. The retail and hotel sectors recorded the greatest year-over-year drops in portfolio-level deals, of 94 percent and 90 percent, respectively.
Jim Costello, chief real estate economist at MSCI, said it was unclear why portfolio sales fell. To some extent, the trends with portfolio and entity-level transactions mirror the broader market, but “there are also idiosyncratic features that sometimes see an investor suddenly dropping a few billion dollars into a sector that had not seen much love for a while,” he said.
While there were no data center trades in February, the sector is reporting the greatest yearly increase over the trailing 12 months, as AI-use continues to grow. There have been nearly $29 billion worth of deals over the past year, a 239 percent year-over-year spike.
Despite the pullback in commercial activity overall and the rise in borrowing costs, pricing is also increasing. Interest rates began to climb in 2022, and the market seems to have finally priced that into valuations, Costello said. This had led to prices stabilizing.
The pricing is likely to remain relatively steady for the near term, Costello said, though the conflict in Iran has been ongoing a little more than a month and its consequences on property remain to be seen.
“It just takes a long time for this stuff to move through,” he said. “It’s not like trading a bushel of soybeans in Chicago, where it trades in a picosecond.”
In February, commercial property values climbed 1.3 percent compared to the same time last year, according to the report.
One highlight was the apartment sector, which eked out a 0.1 percent gain — the first since 2022. The industry’s top performer, from a pricing perspective, in February was industrial, with a 4.2 percent year-over-year increase. Retail and hotel were the laggards, recording drops of almost 2 percent.