August saw $13.9 billion of commercial transaction volume, down a whopping 68% year over year, according to the most recent U.S. Big Picture Capital Trends report from Real Capital Analytics (RCA).
That marks the fifth straight month of high double-digit losses in sales activity for the commercial real estate market as the COVID-19 pandemic continues to wreak havoc on the industry. Year to date, national sales activity is down 36%, with minuscule interest rates not impacting commercial mortgage rates or enticing investors into the fray.
“The 10-year U.S. Treasury has averaged less than 1% every month since March 2020,” Jim Costello, senior vice president at RCA, noted on the company’s Insights blog. “Commercial mortgage rates have barely budged despite this sustained low level for the interest rate environment. In any normal period, low interest rates would be a positive sign for commercial real estate investment.
“While interest rates have fallen, commercial mortgage rates have varied little, averaging 3.8% since March. Granted, a year earlier commercial mortgage rates averaged 4.7%. Even with more favorable financing costs however, potential buyers are fearful to step up to higher prices in the face of struggling tenants and a hazy picture on future income trends.”
Every property sector has seen deal volumes plunge since March, although some continue to weather the storm better than others.
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Multifamily, for example, made up most of August’s transaction volume by far with $5.5 billion in sales for the month, accounting for nearly 40% of overall activity. Like the overall commercial market, the apartment sector has gone through five months of big year-over-year drops, with August at a 65% annual decline. Still, deal activity has managed to average $5.8 billion from April to August; compare that to the same months in 2009 during the Great Recession, when transaction activity averaged just $1.4 billion per month.
Industrial sales also fared better than other sectors, comprising $3.0 billion in sales to account for almost 22% of transaction volume. Year to date, industrial volumes have fared best among all property types, falling 3% just year over year as the pandemic-driven shift from in-store shopping to e-commerce has highlighted the need for logistics and warehousing space.
On the flipside, hotels continue to struggle with the leisure, hospitality and travel sectors bearing the brunt of the coronavirus crisis. Hotels saw the lowest deal volume of all property types, posting just $300 million in transaction activity during August, representing just 6.6% of the month’s market movement. And while sales of distressed assets have yet to see a significant spike for the commercial market as a whole, distressed hotel deals have so far been the exception.
Despite the continued freefalls in sales, commercial property prices haven’t fallen far from pre-pandemic levels. This year, commercial property prices peaked in March, but per RCA’s Commercial Property Price Index (CPPI), August’s prices were only 0.2% lower than those seen that month. Overall, commercial prices were flat from July to August, with August prices up 1.6% from those in August 2019 — a steep dropoff from the 6.0% growth rate the CPPI was seeing at the start of the year. The industrial and multifamily sectors again pace all property types when it comes to price growth, posting year over year gains of 7.4% in August. Retail prices, in comparison, have crumpled, plunging 4.1% year to year.
