US commercial real estate transaction analysis – Q2 2024

Sentiment improves with added ‘clarity’ on rate cuts

The broad improvement in sentiment across capital markets flowed through to commercial real estate (CRE) during the second quarter. Sentiment improved largely on the perception that the Federal Reserve (Fed) was approaching the first rate cut and the increasing belief that a hard landing may be avoided. However, while the sentiment uplift was notable and welcomed, that positivity was not clearly seen in private market CRE transaction data.

Single-asset transaction data show moderating declines

US CRE transaction volume continued to slide through Q2 2024. Cumulative transaction volume across Q2 2024 was the lowest volume ($) since 2013. Investment activity, measured by non-distress single-asset transactions across all major property types, appears on track to fall between 2013 and 2023’s cumulative annual volumes.

Figure 1 - Cumulative weekly transactions

The number of single-asset transactions completed during the second quarter of 2024 was down moderately compared to the same period a year earlier. The 10,186 properties that transacted during Q2 2024 were 9.1% less compared to Q2 2023, while the 19,312 properties transacted during H1 2024 were down 11.9% versus H1 2023. The number of single-property transactions in Q2 2024 was up 11.6% from Q1 2024, with double-digit quarter-on-quarter (QoQ) increases across the retail (+13%), multifamily (+18%), and industrial sectors (+14%). Hospitality transactions fell 13% QoQ and 29% year-on-year (YoY). Single-asset office transactions decreased modestly YoY (-11%), nearly in line with CRE transactions overall, but increased QoQ (+7%).

Figure 2 - Quarterly investment activity (# traded) – YoY % change

The cumulative $40.1 billion transacted across the major property types during Q2 2024 was down 9.4% compared to the prior year (Q2 2024 vs Q2 2023), though up 13.9% versus Q1 2024. Aggregate transaction volume over H1 2024 totaled $75.3 billion, down 11.9% versus H1 2023, and down 16.8% versus H2 2023. The pace of declines across all major property sectors continues to moderate, with YoY declines in Q2 2024 in the single digits for retail (-9%) and office (-6%). Transaction activity increased 4% YoY for industrial properties.

Figure 3 - Quarterly investment activity ($ volume) – YoY % change

Average pricing pace slows

Anecdotes of increased bidding activity for assets on the market stood in stark comparison to the actual closed deal volume. Stable operating fundamentals were accompanied by moderating or declining expectations of future rent and NOI growth, and the delta between public (REITs) and private CRE (direct or PE) valuations narrowed, though both were nearly 20% down from their prior peaks. Pricing on closed transactions (tracked by a 90-day moving average) for most property sectors began to show signs of stabilization in Q2 2024. The average price per square foot of a single property multifamily transaction has declined dramatically (-20.6%) from its Q4 2022 peak. Similarly, the price per square foot of a single property office transaction declined 19% from its Q1 2020 peak.

Figure 4 - US CRE private market price declines slowing

Searching for silver-lining: Decelerating declines

The partial recent pickup in CRE financing activity is contributing to improved investment activity by way of a deceleration in transaction activity declines. Overall CRE investment activity is still well below prior years (peak years of 2021-2022) and more "normal" years (2016-2019). It is looking marginally better, though still not good. The pace of transactions continues to lag significantly and the optimism that started the year, which in turn supported expectations for a recovery in CRE transactions, has largely faded along with the expectations that there would be six or more possible rate cuts by the Fed in 2024. By the end of the second quarter, markets were pricing in the possibility of two to three 25 basis point (bps) rate cuts for the second half of 2024.

Transaction activity remained down through the first half of 2024 due to the high-interest rate environment and limited capital availability. This muted activity, as measured by CRE market transaction momentum or “technical indicators” (i.e., rolling averages of transaction trends) showed signs of a potential bottom in Q2 through Q3 of 2023, but these signs of support faded through the first half of 2024. Across the four major property sectors (industrial, office, multifamily, retail), average daily transaction activity remained significantly below pre-pandemic peaks. Sentiment across capital markets, including for CRE, does seem to be higher than during the rate-hiking cycle but seems to be put into check as the markets continue to adjust expectations for Fed rate cuts. While CRE remains an area of concern and criticism by investors, analysts, and regulators, the moderating declines in transactions suggest that a degree of optimism is returning to the market.

Figure 5 - US CRE private market activity continues decline

Looking ahead

While the outlook for private CRE still appears to be choppy – not all bad, not all good – the improved sentiment coupled with the expectation that the Fed will be embarking on their rate cuts will likely bode well for the entire asset class. Even though there are reasons to believe that risks remain (e.g., distress rising, bank exposure to CRE, valuations still down), private market CRE investment activity appears to be starting to thaw after more than two years of predominantly bad news.

Want to be notified of our new and relevant CRE content, articles and events?