Commercial Real Estate (CRE) transaction volume is usually measured in terms of nominal dollars. “Nominal” just means that these dollars aren’t inflation adjusted. Of course, inflation surged to levels not seen since the early 1980s in 2022. But standard inflation adjustments leave something to be desired in the case of CRE transaction volume, as it doesn’t account for any new buildings added to the existing stock of properties over the measurement period. 

To eliminate this noise and get a clearer picture of the latest trends in CRE transaction volume, we can instead look at the quantity of commercial space transacted. After all, what’s more “real” than the amount of space that’s actually traded? In the case of non-residential CRE (such as office, industrial, or retail properties), space is usually measured in square footage. For apartment properties, space is usually measured in the number of units transacted. Comparing space transacted, instead of nominal dollars, allows for a more apples-to-apples comparison of CRE activity across time periods.

“If rates stay high and credit tight, transaction volume won’t pick up until sellers, likely forced by their mortgage maturing, face the reality of the market-clearing price in today’s environment.” 

Give Me Some Space

There’s no avoiding it: the first quarter was a slow quarter for CRE sales. This is true regardless of how you measure it, including in terms of space.

Transaction volume in the first quarter of 2024 was quite low, even compared to the depressed levels of volume from last year. The quantity of non-residential space traded in the first quarter of this year was lower than in three of four quarters of 2023. Prior to 2023, the last time volume was this low was in the second and third quarters of 2020. These were the highly uncertain, early days of the pandemic, when the economy was temporarily shut down and credit markets were largely frozen. Back then, with remote work being adopted and quarantine policies still in place in most of the country, it was hard to get much of anything done, let alone close large commercial property transactions. All told, only 212 million square feet of nonresidential CRE was transacted in the second quarter of 2020, with 279 million square feet trading in the third quarter of 2020. 

By comparison, in the first quarter of this year approximately 305 million square feet of non-residential CRE was transacted, 9 percent higher than in the third quarter of 2020, but still the third slowest quarter in the last four years. In other words, we couldn’t do deals back then, and now it just seems like we won’t. Apart from the beginning of the pandemic, transactional activity hasn’t been this low since the first quarter of 2013, when the commercial real estate market was still suffering aftershocks from the Global Financial Crisis (GFC) of 2008-2009. 

The first quarter would have been even slower were it not for the resurgence in retail property space transacted. Space transacted in both office and industrial properties in the first quarter was either unchanged or lower than in the third quarter of 2020, yet there was 87 million square feet of retail property space traded in the first quarter of 2024 compared to only 41 million square feet in the third quarter of 2020. 

Multifamily volume fared even worse. In the first quarter of 2024, only about 108,000 apartment units were traded, a 6 percent increase compared to the 102,000 units traded in the second quarter of 2020, making it the slowest quarter since then. Prior to the pandemic, multifamily deal volume in the first quarter was, in unit terms, the lowest since the third quarter of 2010, in the immediate aftermath of the GFC. 

Dude, Where’s my Recovery?

It’s no mystery why transaction volume is low. CRE is a credit-intensive business, and as the cost of debt used to acquire properties has increased, buyers’ purchasing power has declined. Additionally, it’s still challenging to get a loan in this environment. Expensive, relatively scarce credit continues to weigh on the industry. And “higher for longer” interest rates is again back in the headlines, as the Fed currently lacks the economic ammunition to justify rate cuts. 

If rates stay high and credit tight, transaction volume won’t pick up until sellers, likely forced by their mortgage maturing, face the reality of the market-clearing price in today’s environment.