Property Deals Have Collapsed. Prices Haven’t Yet.

Property Deals Have Collapsed. Prices Haven’t Yet.

Property Deals Have Collapsed. Prices Haven’t Yet.

By Carol Ryan

Property investors sat on the sidelines last year waiting for enticing opportunities. But the 2009-style discounts they were hoping for haven’t materialized—at least not for the kinds of buildings they want to own.

Just $374 billion of real estate sold in the U.S. last year, according to MSCI data released Wednesday, a 51% fall compared with 2022. The deal tally was also 14% lower than in 2020, when prospective buyers couldn’t view buildings for most of the year because of Covid-19 lockdowns.

According to the RCA CPPI National All-Property Index, which tracks the value of property deals that closed, U.S. commercial real estate prices are down 11% from peaks seen around the time the Federal Reserve began raising interest rates in early 2022.

Some real estate has certainly become a lot cheaper, but only the riskiest type. Offices in oversupplied central business hubs such as San Francisco have fallen 40% in value since March 2022. They will need major reinvestment to attract tenants.

Apartments, which became overvalued as strong rent growth during the pandemic attracted speculative investors, have slipped 15% from their peak. But e-commerce warehouses haven’t lost any value at all. 

Hotels have barely budged either. They might benefit from a crackdown on 

Airbnb rentals in cities such as New York, particularly as prices already took a hit during the pandemic. Some niche real estate such as self-storage facilities are also holding their value, as investors hunt for properties with low operating costs and reliable income streams.

High interest rates haven’t triggered many of the distressed sales that pushed prices down in the years around the 2008 financial crisis. As economic growth has been healthy in the U.S., most tenants are still paying the rent. Landlords are more stretched, with rental income equivalent to about 1.6 times mortgage costs at the end of October, compared with a long-term average of 2.1. But the ratio is still above the minimum that lenders require to underwrite a loan.

Owners that sold properties in last year’s weak market needed to raise cash quickly. Maybe their bank asked them to inject more equity into a different property to help refinance it, or they had to sell assets to meet investor demands. Blackstone’s nontraded real-estate fund, BREIT, sold nearly $12 billion of U.S. property last year to meet redemption requests. But these deals were hardly fire sales. Most of what sold consisted of high-quality buildings that didn’t need heavy discounting.

Prices will probably fall further in unloved sectors. The gap between what buyers are willing to pay and what sellers will accept is still especially wide for city-center offices. Prices might need to come down a further 20%.

But in a hopeful sign for owners, publicly listed real-estate stocks have started to recover from their slump. U.S. real-estate investment trusts gained 14% last year, on average. Stocks can be an early indicator of what will happen to property values in the private market, albeit with a lag of as much as 12 months.

Investors have raised $240 billion to pour into U.S. real estate, based on dry powder data from Preqin. The slump in deal activity has echoes of what happened during the financial crisis, when some of the most profitable property deals in modern history were struck. But it would take a much more troubled economy to throw up similar bargains in 2024.

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