Diverging Sale Prices: Large vs. Small Properties

The April 2023 CoStar Commercial Repeat Sale Indices (CCRSI) data reveals a growing divergence in the commercial real estate market, with multifamily leading the decline. Miami’s commercial real estate market is experiencing a significant downturn, with an 80% plunge in Q1 sales volume, primarily driven by office deals.

Diverging Sale Prices: Large vs. Small Properties

The April 2023 CoStar Commercial Repeat Sale Indices (CCRSI) data reveals a growing divergence in the commercial real estate market, with multifamily leading the decline. Miami's commercial real estate market is experiencing a significant downturn, with an 80% plunge in Q1 sales volume, primarily driven by office deals.

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Market Snapshot

S&P 500
GSPC
4,205.45
Pct Chg:
1.3%
FTSE NAREIT
FNER
679.09
Pct Chg:
1.1%
10Y Treasury
TNX
3.810%
Pct Chg:
-0.1%
SOFR
1-month
5.06%
Pct Chg:
0.2%

*Data as of 5/26/2023 market close.

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PRICE DIVERGENCE

Double-Digit Drops Hit April Deals for Large and Small Properties

Source: CoStar (Both composite indices have been on a broad deceleration trend year-over-year since the first half of 2022 as markets responded to rising interest rates)

The CoStar Commercial Repeat Sale Indices (CCRSI) data for April 2023 reveals a growing divergence in the commercial real estate (CRE) market. Larger properties are experiencing a decline in prices, while smaller properties are appreciating in value.

Core markets: The U.S. Composite Index, representing major city sales and property values, fell by 1.4% to 270 in April. This marks a nine-month decline and a 7.6% decrease over the 12-month period ending in April. The index remains 11.7% lower than its peak in July 2022.

Secondary markets: The equal-weighted U.S. Composite Index, which reflects lower-priced property sales in secondary and tertiary markets, increased by 0.8% in April to reach 312. Over the 12-month period ending in April, the index saw a gain of 2.8% and was only 1% below its peak in June 2022.

Behind the numbers: Composite indices have been slowing down since the first half of 2022 in response to rising interest rates. Chad Littell, CoStar's national director of U.S. capital markets analytics, explains that institutional investors are cautious while private investors view real estate as an inflation hedge. Private investors have experienced declines in their equity and fixed-income portfolios. The pricing in private real estate markets lags behind public markets due to the absence of quarterly mark-to-market valuations.

Multifamily meltdown: Double-digit annual price declines in multifamily properties, not seen since the Great Recession, emerged in April. The multifamily sub-index experienced a 1.4% decline, marking its ninth consecutive month of decreases after reaching a peak of 420 in July 2022. Over the 12-month period ending in April, the index witnessed a significant pullback of 12.2%, the largest year-over-year decline since February 2010. Falling net absorption and a surge in supply deliveries are impacting occupancy levels and limiting the ability to increase rents at the same pace as in previous years, as explained by Littell.

Transaction volume: Commercial real estate transaction activity in April experienced a significant decline, with a 44.1% collapse to $5.3 billion. Investment grade transaction volume fell by 49.3% to $2.7 billion, while the general commercial segment dropped by 37.2% to $2.5 billion. The decline in trade volumes was attributed to soaring interest rates and an uncertain economic backdrop.

โžฅ THE TAKEAWAY

Big picture: The data reveals a divided commercial real estate market. Larger properties are declining in value, while smaller properties are appreciating. Rising interest rates and cautious institutional investors are contributing to this trend. Leading the decline is the multifamily sector, with limited rent growth. Transaction volume is also decreasing due to high interest rates and economic uncertainty.

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MAGIC CITY WOES

Miami and Miami Beach Commercial Sales Volume Plunges 80% in Q1 Led by Office Deals

Miami's once thriving commercial real estate market is experiencing a significant downturn, with sales volume plunging 80% in Q1, led by office deals.

Sales volume fizzling: A report by Dwntwn Realty Advisors, led by Tony Arellano and Devlin Marinoff, shows an alarming 80% drop in Miami's commercial real estate sales volume in the first three months of this year compared to the same period last year. The study examined multiple Miami neighborhoods and property types, including commercial land, office, multifamily, industrial, and retail deals.

Impact of rate hikes: The Federal Reserve's swift interest rate hikes have deeply affected the market, causing a credit crunch and banking crisis. The report highlights how the uncertain interest rate forecasts have severely damaged the value of long-term assets like real estate, treasuries, and bonds. Consequently, banks are hesitant to lend, resulting in a substantial decrease in sales volume in the first quarter of this year.

Sector-specific declines: The office sector experienced a staggering 97% drop in sales volume compared to the same period last year. Multifamily sales volume decreased by 83%, while industrial sales volume dropped by 89%. The retail sector saw a decline of 65%, land sales volume decreased by 77%, and hotel sales volume experienced a 29% drop in the first quarter of this year compared to the previous year.

โžฅ THE TAKEAWAY

Growing optimism: Despite the current challenges, Devlin Marinoff is optimistic about Miami and Miami Beach's real estate market. The demand from out-of-state investors, particularly through 1031 exchange deals, signals ongoing activity and growth potential. Moreover, the minimal debt involved in these purchases provides stability amid the current downturn.

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๐Ÿ“ฐ Around the Web

๐Ÿ“–ย Read about why major commercial real estate firms are joining resources to recruit Black student-athletes.

๐Ÿ–ฅ๏ธ Watch Jacob Passy explain why Walt Disney is reversing course on a nearly $900M corporate campus amid growing tensions with Florida Gov. Ron DeSantis.

๐ŸŽง Listen to a seasoned investor spearheading multimillion-dollar investments in metro Denver and Los Angeles share valuable insights on pricing real estate assets and predicting risks and cash flows.

๐Ÿ“ฐ Daily Picks
  • Loan exposure: Bank researchers suggest that while office loan losses could potentially reach 8%, a collapse of the U.S. commercial real estate sector that would cause financial market turmoil is highly unlikely.

  • The agreement: President Joe Biden and House Speaker Kevin McCarthy reached a "principle agreement" to raise the national debt ceiling on Saturday, aiming to prevent a catastrophic U.S. default and control federal spending.

  • Unload assets: Vornado recently sold its Rego Park development site at a significant discount, with the price tag falling 16% short of the initial target of $85M set when the property was listed for sale approximately two years ago.

  • Co-living conversion: Northwind Group has financed the conversion of Manhattan's Hudson Hotel into a 441-unit community with a $100M senior A-Note as part of a $207M senior lease-hold mortgage.

  • Affordable housing: Nantucket, known for its summer charm and celebrity visitors, faces a housing crisis that affects critical service workers who canโ€™t afford to live on the island. Now residents are fighting back.

  • Pace on the books: Summer travel and hotel demand in 2023 is rising, but destinations like Miami and Daytona Beach are declining in popularity after previous years of strong demand growth.

  • Leading the way: Houston's real estate scene has boomed more than any other U.S. city in the past decade, according to a study cited by the Houston Chronicle.

  • Risk management: The largest home insurance company in the US has declared that it will cease providing coverage for houses in California due to the excessive risk posed by wildfires and the substantial cost of rebuilding.

  • Southern hospitality: Southern Living ranked their favorite hotels in the South, highlighting outstanding options with great ambiance, amenities, location, and historical significance.

๐Ÿ“ˆ Chart of the Day

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