Pricing Plummets: Decoding the Dynamics Behind Commercial Real Estate Values in 2023

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Episode Transcript:

In 2023, commercial property sales volume took a nosedive, plummeting by a staggering 51% to $374.1 billion, as reported by MSCI Real Capital Analytics in their 2023 Capital Trends report. The conditions, as described by the report's authors, bore an eerie resemblance to the darkest days of the Global Financial Crisis.

The decline in sales volume was particularly pronounced in the apartment sector, which saw a whopping 61% drop, totaling $119 billion in 2023. Softening rents and the end of the multifamily frenzy that characterized the early pandemic years contributed to this downturn.

Meanwhile, the office sector experienced a 53% year-over-year decline in sales volume, with transactions amounting to just $3.1 billion in 2023.

Despite the stark decline in sales figures compared to the previous year's highs, the report highlighted that when viewed in the context of average annual deal volume figures from 2015 to 2019, sales activity was only down by 32%.

While prices didn't experience as dramatic a plunge as sales volume, there were still notable shifts. Office prices, for instance, saw a significant 16.1% drop compared to 2022. However, this drop was the most substantial among the property types surveyed.

Apartments and retail properties also witnessed declines in pricing, with drops of 8.4% and 5.5%, respectively. Nevertheless, these decreases fell short of the fire-sale discounts that many investors had anticipated.

Comparing 2023 CRE prices to their peaks in early 2022, before the Federal Reserve embarked on its interest rate-raising campaign, some declines were more pronounced. Central business district office buildings, for instance, saw a staggering 40% drop in value from their 2022 peaks, while overall office values experienced a 20% decline. Conversely, apartments retained 85% of their peak value, hotels saw less than a 5% discount, and industrial real estate remained unchanged from its 2022 peak.

As the commercial real estate landscape continues to evolve, these insights provide a snapshot of the challenges and opportunities shaping the market in 2023 and beyond.

This is Tyler Cauble, Signing off