Commercial real estate deal volume saw a drastic year-over-year reduction in the third quarter of this year, according to the newest U.S. Big Picture Capital Trends report from MSCI Real Assets.
Transaction volume during the quarter came in at $172.2 billion, down 21% annually. MSCI’s report, in a sense, called the year-over-year pullback “part two” of the downturn from the COVID-19 pandemic — a sequel of sorts to the four consecutive quarters of steep yearly declines at the start of the health crisis.
But while that period of retreat was precipitated by vanishing investor confidence, the decline in third-quarter 2022 is a different animal entirely. This slowdown is a reaction to the growing cost of capital, with rapidly ascending mortgage interest rates raising the coupon on a seven- to 10-year fixed-rate mortgage from 3.5% in September 2021 to 5.4% early in Q3 2022. Meanwhile, capitalization rates have trended downward over the same time span, limiting the benefits of leverage for property acquisitions when coupled with expensive financing costs.
Notably, the deceleration of deals is happening more rapidly than quarterly figures represent, MSCI reported. The falloff in deal activity has been intensifying on a monthly basis, and the year-over-year declines in single-asset deal volume accelerated during each month of the quarter, from an 11% annual reduction in July to 21% in August and 37% in September. And while some prominent entity-level deals closed in Q3, portfolio and entity-level transactions weren’t immune, falling by 14% compared to Q3 2021.
Cumulatively, deal volume remains higher thus far this year than last. Total transaction volume is up 16% year to date through the third quarter, with single-asset deals up 15% and portfolio and entity-level volume up 21%. And compared with historical figures, Q3 2022 volume still stacks up positively: Consider that in the third quarters of the five years prior to the pandemic, the average volume was $141 billion.
Sales prices were up 11.1% year over year, although they have started to show signs of softening. For instance, MSCI’s Commercial Property Price Index (CPPI) for central business district office buildings declined at an annualized pace of 2% between the second and third quarters of this year. And while no other commercial asset sector showed a nominal price decrease over that same time, the CPPI for retail posted only a 2.3% year gain from Q2 to Q3 — well below the inflation rate.