Commercial real estate market continues double-digit declines in sales activity

Photo by noodle kimm on Unsplash

The commercial real estate market has gone through five months of high double-digit declines in sales activity according to Real Capital Analytics.  According to their August 2020 report, the property sectors have been dragged down in this Covid-19 calamity, but some are faring worse than others. Distressed debt situations continue to are spike, but the sale of distressed assets has yet to climb in a significant way.

Apartments were the largest sector for transaction volume in August, accounting for 40% of all commercial real estate sales. Still, the $5.4b in apartments traded is a low figure compared to recent years, and was down 65% from a year earlier.

Hotels had the lowest level of deal volume across the main property types with only $300m in activity. Even the sale of development sites came in stronger. Hotel sales were already under pressure before Covid-19 hit, but with the shutdown in travel and tourism, the sector is further under strain and distressed hotel deals are rising.

With these declines in place some have been wondering about where are all of the distressed properties and foreclosures.

Levels of distress continue to climb, but distressed asset sales, not so much. It takes time for distress situations to be resolved and except for the hotel sector, sales of distressed assets have not climbed dramatically.

In the current downturn, sales of distressed assets have yet not moved much from the pre-recession trends. Distressed sales represented only 1.4% of total transaction activity in Q2’20, a level not much different from the trend set over the previous two years. As distressed sales began to rise as a share of total activity in 2009, however, the price information from these deals helped to set investors’ expectations on pricing overall.

Slight single-digit declines in property prices accelerated to a double-digit pace, with the RCA All-Property CPPI hitting a low-water mark in Q4’10.

 It remains unclear if in this current downturn will again take three full years from the start of the recession for commercial property prices to hit a low point. Distress continues move into the system faster this time which might accelerate the process of distressed sales. Until these distressed assets hit the market in the significant way, however, asset pricing will remain clouded.