Deal flow slowed and pricing slumped across major commercial real estate asset classes as the third quarter ended — and that’s prompted some experts to wonder if the sector will continue to hew to its historical trend of “fourth quarter comebacks.”
Average price increases across major property types slowed to 14% year over year in August, a 260 basis point slump below July figures, according to MSCI Real Capital Analytics data. And while transaction volume from a dollar standpoint has been at all-time highs for much of this year, fewer properties are trading.
According to experts from SVN International, that indicates “price-growth is currently being driven more by supply shortages rather than a demand-spike.” Analysts there point to MSCI data showing that transaction volume tends to perform better in the second half of the year compared to H1 in both dollars and total properties sold. Generally, total sales on average are 19% higher in Q3 and Q3 over the first two quarters and pricing tends to be up 16% in the same period.
But “while history suggests that CRE should have the wind at its back entering Q4, weather predictions have been a dicey undertaking in recent years,” SVN analysts note in a new report. “Recession signals are escalating, with modest warning signs already flashing in the latest real estate data. During August, US commercial property transactions continued to climb, but at the slowest rate so far.”
What happens next is at least partially dependent on further action by the Federal Reserve, which continues to raise interest rates in an effort to tamp down inflation. And “the Fed won’t blink” if a recession come, says Marcus & Millichap’s John Chan, noting the Fed has “basically suggested they’re done front-loading rates.”
“We may be facing a bumpy road in 2023 but if the Fed’s plan works, inflation will come back down and the economy will enter a new growth cycle,” he predicts.