Ongoing increases in the Effective Federal Funds Rate, combined with tightening debt and concerns over economic volatility took their toll on commercial real estate sales in Q1 2023. According to CBRE’s U.S. Capital Markets report for the quarter, overall deal volume dropped by 57% year over year to $78 billion.

Breaking it down:

• Single-asset sales fell by 55% to $58 billion

• Portfolio sales fell by 69% to $11 billion

Numbers issued by Moody’s Analytics note that the transaction declines have been ongoing since Q3 2022.

“The protracted challenging debt environment has seriously hampered transaction activity,” Baker Tilly weighed in, adding that the major transactions consisted primarily of equity deals. “Cash is definitely king in the current environment,” the Baker Tilly analysts added in the company’s Commercial Real Estate Market Report: Q1 2023.

Multifamily Is King — Still

Both CBRE and Baker Tilly noted that multifamily sales remained strong. The CBRE analysts reported that deals totaled $25 billion in Q1 reporting a 63.7% year-over-year decline. Baker Tilly researchers pointed out that, while there was a decrease in high-dollar transactions, “2023 has already seen some record-setting prices.”

Industrial Remains Steady

CBRE reported that Q1 industrial sales volume fell by 55% year over year, ending up at $18 billion. Baker Tilly pointed out that 2023 started with high-dollar transactions, that leveled out as the quarter progressed. Still, “the industrial sector continues to generate enthusiasm among commercial real estate investors for its low vacancies, high rent growth and perceived safety in the midst of macroeconomic headwinds as a national recession looms,” according to the Baker Tilly analysts.

Retail Holds its Own

CBRE numbers indicated that retail investment volume fell by 29% from the previous year, coming in at $17 billion. Baker Tilly noted that strong interest continues in grocery-anchored centers. Meanwhile, the challenged office sector is impacting retail, especially in downtown areas and bid-ask spreads are exerting downward pressure on NNN properties, the Baker Tilly analyst said.

The outlook is that while deals will continue to get done in 2023, the high-volume days are likely in the past. This will be the state of affairs “until either interest rates subside or sellers adjust pricing to get things done,” the Baker Tilly analysts commented. “We would imagine that, absent distressed buyers, sellers are willing to wait out the current environment a bit longer to see how things develop.”

In the meantime, depressed REIT prices could mean opportunistic deal-making, Baker Tilly experts added.