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Should the commercial real estate industry panic?
Deal activity, measured by sales volume, plunged 33 percent — to $24.7 billion — in April compared to the year before, according to the latest MSCI Capital Trends report.
If these figures concern industry watchers, they shouldn’t, according to Jim Costello, executive director of MSCI’s research and development team. Year to date, deal volume hit $163.5 billion, a 14 percent year-over-year increase, indicating that activity is not on a downward spiral.
Costello also pointed to MSCI’s commercial pricing index, which measures office, retail, industrial and apartment building prices. That was up 1.1 percent year over year in April and 2.1 percent year over year in the first quarter
“If you had deal volume falling and then pricing suddenly collapsed — now that’s a sign” of trouble, he said.
Deal volume in April dropped in all sectors except for senior housing, which has long benefitted from strong demographics underpinning demand and saw its sales volume rise 13 percent year over year, and suburban offices, which climbed 6 percent year over year, per MSCI’s report. The analysis did not provide pricing for senior housing properties, but suburban offices saw their prices climb 3.1 percent year over year.
The sector that recorded the starkest drop was multifamily, which saw activity plunge by 50 percent over the same period. Pricing for the sector also fell year over year, by 1.1 percent. Apartments are facing some legacy challenges, particularly in smaller cities where there was a push toward more urban living environments that have since been overbuilt, Costello said.
While Costello cautioned that the report focuses on one month of data, there are broader headwinds that the industry is watching. Long-term inflation is top of mind for many, along with the yield on the 10-year Treasury which has remained above 4 percent for the past couple of months, all of which can cause deal activity to stagnate. In mid-May, the rate hit a recent peak of 4.67 percent.
“There is some concern that this is going to take the wind out of the market,” Costello said.
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The conflict in the Middle East has not seemed to have a major effect on deal activity in the U.S. so far, as many anticipate that the war will not be drawn out, according to Darin Mellott, head of U.S. investor research at CBRE. But the longer it continues, the greater the risk to the economy and, eventually, real estate.
CBRE tracks why some commercial deals voluntarily fall apart. Mellott said he identified just one that was delayed because of financing issues stemming from the conflict.
“I think we’ve got quite a long way to go before we start seeing the worst effects,” Mellott said.
The real culprit is the 10-year Treasury staying above 4 percent, he said.
“Then you start saying, okay, one can only defy gravity for so long,” Mellott said.