US CRE transaction analysis – Q4 2023

Q4 2023: Transaction volume remains low as US CRE industry grapples with macroeconomic headwinds

Cumulative transaction volume across US CRE in 2023 was the lowest level of volume ($) since 2013. Investment activity (measured by non-distress single-asset transactions, across all property types) was down significantly compared to recent years, driven by the disruption of the rapidly rising cost of capital and volatile financing conditions for CRE – which drove uncertain outcomes at properties and valuations.

Figure 1 - Cumulative weekly transactions

Through the fourth quarter of 2023, cumulative CRE transaction volume remained significantly depressed compared to prior years; however, the fourth quarter did show a slight increase in transaction activity compared to the three prior quarters. The cumulative $189.9 billion invested across the major property types through 2023 was down 48% compared to the prior year. The aggregate transaction volume over the full 2023 year marked the slowest level of activity since 2013, down from the 2021 peak year by 55%.

Transaction volumes totaled $58.5 billion this quarter, up 36% from Q3 2023, but down 17% from Q4 2022. On a quarter-over-quarter basis, the Q4 2023 volumes were up vs the Q3 2023 volumes across all property types, with the exception of multifamily.

Figure 2 - Quarterly investment activity ($ volume)

A steep decline in single-asset transactions

The number of single-asset transactions completed throughout 2023 was also down significantly compared to prior years. The 47,889 properties transacted during 2023 was down 30% compared to 2022 and marked the slowest year since 2012.

In Q4 2023, CRE transactions totaled 14,595, nearly flat (3%) from Q4 2022 and up 36% from Q3 2023. For the fourth quarter, all property types saw the count of transactions increase by more than 20% when compared with Q3 2023, with industrial leading (50%) and multifamily lagging (20%). However, much of the increase can be attributed to seasonality in the data, as fourth quarters are usually the biggest quarter due to recording dates.

Figure 3 - Quarterly investment activity (# traded)

What’s the silver lining?

While overall levels for 2023 remained depressed, the final quarter of the year reflected a bump in transaction volume which was slightly above the historical quarterly average in terms of both count of transactions and volume ($) transacted. However, this final quarter bump was not enough to get the overall transaction volume up to its historical trend line.

Figure 4 - Current ($ billion) activity across all major CRE sectors versus trend

Transaction size continues to decline

Industrial properties accounted for 27% of the transaction volume in Q4 2023, up 9 percentage points (pp) from its long-run historical average share (18%). Multifamily accounted for 27%, down 8pp from its historical average share (36%). Office transactions accounted for 19% of total volume, down 4pp from its historical average share (23%). Retail accounted for 18% of Q4 2023 volume, up 2pp from its 15% historical average share. Hospitality transactions accounted for 8% of total volume in Q4 2023, up 2pp from its historical average share of 6%.

Figure 5 - Sector composition of transactions ($ volume) – Q4 2023

Average transaction size in Q4 2023 continued to fall on both a quarter-over-quarter (QoQ) and year-over-year (YoY) basis. Average deal size for multifamily fell the most, -38% on a YoY basis and -14% on a QoQ basis, followed by Commercial General average deal size, which were down -26% compared to Q4 2022 and -7% compared to Q3 2023.

Figure 6 - Average transaction size ($) - Q4 2023 simple moving average

CRE is an interest rate-sensitive asset class and, as a result, it will always react to the interest rate environment. While rates have been high – and economic predictions have remained somewhat apocalyptic – transaction activity has, unsurprisingly, stalled across the market. However, as the broad economy continues to grow, inflation cooling, and central banks appear to be readying for a shift to easing monetary policy, the ‘soft-landing’ narrative prevails.