Marked Drop in Transactions Could Carry Into 2023, Executives Say
By Mark Heschmeyer
CoStar News
January 8, 2023
| 7:54 P.M.
U.S. property
sales for the fourth quarter, usually the most active part of the year, are
shaping up to be among the worst on a percentage basis since the country was in
the throes of the Great Recession.
CoStar Group
data as tabulated through the first week of January shows fourth-quarter sales
so far are amounting to less than 25% of the year's total volume. If the
results stand, it would be only the third time a slowdown of this scale has
happened this century. Fourth-quarter U.S. real estate deals were 17.9% of the
annual total, the lowest this century aside from the 17.3% in 2008.
The slowdown
in transactions evidenced in the data is likely to continue into at least the
first half of 2023 as a recession looms and the Federal Reserve continues
raising borrowing rates, investment sales brokers told CoStar News in email
interviews.
"Historically,
the fourth quarter is always a high-volume quarter with deals rushing to get
done before the end of the year for various reasons such as political policy
changes, taxes or just trying to spend down annual required allotments. Last
year, it was very different," said David Dirkschneider, managing director of
Capstone Companies in Oklahoma City. "Starting in the third quarter, things got
very quiet, and what happens in the third quarter closes in the fourth."
Dirkschneider
projected fewer sales in 2023.
"The pipeline
is much lighter than 12 months ago," he said. "So, I believe the first and
second quarters will be fairly slow, with some deals transacting, but only when
the seller has a specific reason to do so."
The deceleration in the third quarter started on
the sellers' side, according to Michael Jerbich, president of B. Riley Real
Estate in Chicago.
"We saw a slowdown of listings coupled with a
shrinking buyer pool," Jerbich said. "Given the continued interest rate hikes,
many buyers sat on the sidelines due to the short-term uncertainty."
He said that many sellers opted for a "wait and
see approach" because of capitalization rate increases, which indicate more
risk in a real estate investment. Another industry concern affecting deals is
whether the Fed can successfully reel in inflation while not throwing the
economy into a recession.
Like
Dirkschneider, Jerbich
expects low sales volume in the first half of 2023.
Brokers
across the country said activity in their market matches the downward trend
emerging in CoStar data.
"Anecdotally,
transaction volume appears to be down quite a bit," said Zach Wright, director
and partner of Blue West Capital in Denver. "We're in a period of price
discovery as buyers and sellers work to figure out appropriate pricing in
today's environment. This is a unique year and previous norms are unlikely to
apply. The change in the market from January 2022 to December 2022 has been
pronounced."
Far Under
Century Average
While CoStar
is still researching and tabulating fourth-quarter sales, in-house analysts do
not think there are enough large, uncounted deals to significantly make up the
gap that has emerged so far.
The
fourth-quarter sales total of $156 billion as of the first week of January was
the lowest fourth-quarter total since 2013. Fourth-quarter sales have averaged
$201 billion over the past 10 years, according to CoStar data.
Sales in the
fourth quarter made up only 17.9% of the year's total. The average percentage
for the century has been 30.3%, CoStar data shows. The latest quarterly
percentage is just slightly better than the lowest mark recorded since 2000 of
17.3% in 2008.
"The
volatility in the debt markets caused most institutional investors to be
strategic in their activity," said Joe Cesta, executive vice president of CBRE
National Partners in Newport Beach, California. "The debt markets caused larger
transactions of more than $250 million to be more problematic, while smaller
transactions still traded."
CoStar data
supports Cesta's observation. Sales of $250 million or more fell 64% in the
second half of the year over the first half. Sales of less than $250 million
fell just 19%.
Fourth-quarter
weakness "is mainly due to the spike in borrowing rates," said Lev Mavashev,
managing principal of Alpha Realty in New York. "We saw rates double in a span
of 10 months. Buyers were quoted 3% debt in February and March, and then 6% in
September and October. Yikes."
Even deals
that were slated to close got postponed — some more than once, according to
Mavashev.
Todd
Hamilton, managing partner of Citywide Commercial in Phoenix noted two other
reasons for the fourth-quarter doldrums: historically low inventory levels of
listed properties for sale and for-lease properties, and the fear and constant
drumbeat of a 2023 recession.
"Investors
are holding until they have a better understanding of where the market is
headed in 2023," said Michael Wess, partner of Bull Realty in Atlanta. "Most
sellers have not discounted their pricing far enough to match buyers' appetite
to bite."