Though U.S. commercial real estate volume fell 63% year over year, the full-year 2022 volume of $671 billion was the second highest amount on record, according to CBRE’s U.S. Capital Markets Q4 2022 report. Multifamily ended up being the leading sector during Q4 at a volume of $48 billion, followed by industrial and logistics ($32 billion) and office ($19 billion).

The CBRE report noted that private buyers took first place with an investment volume of $78 billion. Private and institutional investors were net buyers in the quarter, while REITs and cross-border investors were net sellers.

Though multifamily was a favorite among investors, Newmark’s United States Multifamily Capital Markets Report Q4 2022 said that total returns experienced deceleration during the second half of 2022. On the other hand, increased mortgage rates and higher home prices continue to benefit the multifamily sector, the report added.

Baker Tilly’s Q4 2022 Commercial Real Estate Market Report added background to the issue, saying that, while “dry powder remains extremely elevated as it has for quite some time,” bid-ask spreads widened, while financing markets are tight. “With transaction activity down and motivated sellers needing to be open to price reductions, cap rates have begun to show some slight upward movement,” the report continued.

Newmark analysts supported this assertion with multifamily properties in 2023; despite many potential buyers being awash in capital, “activity is likely to be sluggish as price dislocation and valuations are scrutinized,” Newmark said.

Added to slowing transactions are tight debt markets. That, plus upcoming short-term maturities. “Another potential issue for debt holders, particularly in the office sector, is the looming number of lease expirations,” the Baker Tilly report noted. Demand uncertainty related to office usage is a problem. “If office users are unable to replace major leases or pivot quickly, they could find themselves in distress and at risk of default on their debt,” according to Baker Tilly.

Focusing on multifamily, the Newmark report showed debt originations down 29% year over year in Q4. Still, given Q4 2021’s high bar, the drop wasn’t concerning to the Newmark analysts, partially because GSEs are providing somewhat a buffer against cyclical lending conditions. “Projected volumes for the fourth quarter of 2022 are still the third-best fourth-quarter performance,” said Newmark analysis.

But similar to Baker Tilly’s office debt maturity concerns, Newmark analysts indicated that multifamily won’t remain unscathed. Higher debt costs on refinancing will lower returns. While some owners will refinance the principal or partially pay down, “others will be unable to make the math work, and will need to pursue a loan modification, return the keys and/or source rescue equity at an appropriate price point,” Newmark said.