US commercial real estate transaction analysis – Q3 2024

Rate cuts begin, bringing a return of optimism to outlooks

There was a real change of tune through the third quarter, as many of the large institutional investors and owners of commercial real estate (CRE) expressed growing optimism for the asset class. Starting in the second quarter and increasingly so through the third quarter, many prominent money managers were increasingly vocal about calling “the bottom” for CRE.

The surge in CRE industry optimism only seemed to increase leading up to and following the first interest rate cut by the Federal Reserve (Fed) in mid-September – and seemed to be largely justified, as lower cost of capital should help to alleviate many of the challenges faced by the CRE industry and professionals (lenders, owners/investors, operators, brokers, valuers, etc.). However, as we noted in the Q3 2024 CRE Industry Conditions and Sentiment Survey, this rising optimism was coupled with declining conviction, suggesting that the industry remains uncertain about when these benefits will be realized or if they will be felt by all.

Improving sentiment and outlooks for the asset class are welcome and needed; however, these metrics are leading and soft in nature, so they may deviate from or not fully align with the “hard” metrics, such as actual transaction activity. And that is exactly what seemed to happen in the third quarter of this year—despite the improved sentiment and outlooks for US CRE, market activity continued to be stagnant.

Transactions reflect existing challenges, though declines moderate

Transaction activity for single-asset CRE properties in the US declined through Q3 2024. Cumulative transaction activity, measured by the count (# of properties transacted), volume ($ aggregate of transactions), and square feet (aggregate SF of transacted properties) fell compared to the prior quarter.

The cumulative total transaction volume for the first three quarters of the year was the lowest level since 2013. Investment activity, measured by non-distress single-asset transactions across all major property types, continues to appear on track to fall between 2013 and 2023’s cumulative annual volumes.

Compared to Q2 2024, aggregate activity for single-asset transactions declined in terms of count of properties traded (-10.0%), dollar volume (-6.6%), and square feet (-3.8%). Compared to Q3 2023, Q3 2024 transaction activity was down -9.9% by count, -9.6% by dollar volume, and -11.4% by square feet. While the aggregate national transaction activity statistics reflected a CRE market in decline, there was a wide variance in terms of transaction activity for the quarter across the top 100 markets (MSAs). As noted in the Q2 2024 quarterly transaction update, third-quarter data continues to look choppy – a mix of good and bad – albeit with signs of improvement. While solid property performance persists and distress levels remain moderate, meaningful improvements to the cost and availability of capital have yet to materialize at scale and remained headwinds for transaction activity through the third quarter.

Number of properties transacted in Q3 2024 by property sector (Year-over-year change)

Pricing improves across most sectors

Despite the slowing transaction activity, the average transacted price ($/SF) in Q3 2024 improved for all major sectors, except for hospitality. Across all major sectors, transaction pricing increased +1.2% compared to Q2 2024 and decreased -1.6% compared to Q3 2024.

The 90-day moving average transacted price ($/SF) for most sectors increased in Q3 2024 compared to Q2 2024, led by office (+3.2%). The largest quarter-on-quarter increases in pricing for subsectors were in mixed-use (+7.5%) and manufacturing properties (+6.3%), while the largest declines were in bars + restaurants (-7.7%) and commercial general/misc. (-3.7%).

Compared to the third quarter in the prior year, the recent quarter’s pricing was more mixed: industrial (+6.6%), office (+3.5%), retail (-0.3%), hospitality (-0.4%), and multifamily (-8.7%). The largest year-on-year increases in pricing for subsectors were in limited-service hotels (+16.4%) and storage properties (+9.8%), while the largest declines were in commercial general/misc. (-10.3%) and bars + restaurants (-6.4%).

Q3 2024 pricing changes

Favorable backdrop, but new questions and considerations

Taking stock of the current conditions for CRE transaction activity, it is easy to see why many large capital allocators’ outlooks are warming up:

• the US economy continues to hum along and outperform expectations and looks even better compared to other global economies

• the perceived recession risk and once-highly-anticipated fallout from monetary tightening and higher rates have not materialized

• the Fed has joined other global central banks in initiating rate cuts

• capital markets continue to show signs of strength and positive risk appetite (i.e., credit spreads remain historically tight, equity valuations are full but substantiated by expected earnings growth and continued strong reported results)

• CRE cash flows across most sectors have remained stable, while distress has ticked up only modestly, if not pushed out

• valuations for both listed public and private market CRE appear to have started their recovery

• a handful of notable and large portfolio transactions have demonstrated the appetite for CRE and to some degree renewed positive attention towards the asset class

Now that the question of “when will the Fed start to cut rates?” was answered in the third quarter, the next question is “how fast will the Fed cut going forward?” The US presidential election raised some market uncertainty, but has also been answered and the results appear to be generally well-received by the market. While there are some policy questions that remain unanswered (i.e., taxes, tariffs, housing policy changes, etc.), it is unlikely that these will be fully answered before the new year.

Two key questions that we should get more color on before 2025 and which have a large impact on the CRE transaction activity in the fourth quarter:

1. Where are the yields on US Treasury securities and corporate bonds headed?

2. What will the CRE lender landscape look like in Q4?

The first question has to do with the effective cost of capital for CRE borrowers – which will help to better understand the recovery speed of transaction activity and distress / refinancing risk within the market. The second question has to do with capital availability – whether banks will return to the market at scale or if the recent resurgence of securitization issuance can pick up the slack or when the large credit funds may start deploying capital.

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