First quarter data from commercial real estate exchange CREXi showed that investor searches for potential acquisitions have been increasing. But the still unresolved pricing gap between buyers and sellers of commercial real estate is limiting the number of closed deals and prolonging the amount of time it takes to get a deal to completion.
According to Eli Randel, chief operating officer of CREXi, the latest figures support the thesis that there are plenty of investors interested in picking up commercial real estate assets, but they are waiting for prices to reach the level they feel comfortable with in a marketplace where debt is more expensive and the economic outlook is murkier.
“I think there’s a lot of capital on the sidelines, seeking investment, seeking placement,” Randel said. “There’s a flight to quality, and in many eyes, healthy commercial real estate assets are still safe investments. In my mind, there’s probably less volatility [in commercial real estate] than in the equity markets. So, I think there’s a lot of capital. However, we have that bid/ask gap and a wait-and-see approach, and there are external factors like interest rates, so it’s causing a stagnant state.”
CREXi’s National Trends Report for the first quarter of 2023 found that the total number of actions that typically lead to purchase, which include page views, clicks on a property’s details page, signed offering memorandums and confidentiality agreements, as well as offers submitted, rose by 26.5% quarter-over-quarter in the first three months of 2023, and was up 8.62% year-over-year. The number of unique leads went up by roughly 25.3% quarter-over-quarter and 15.3% year-over-year.
At the same time, investors made fewer actual offers, likely due to tighter lending requirements and the necessity for stringent due diligence on new deals to account for higher interest rates, noted the report’s authors. In total, there were 92,260 sales that closed on the platform during the first quarter of the year, less than half the total recorded in the fourth quarter of 2022. It also took longer to complete deals—the median number of months between a property listing and a closing rose to 170 days from 162 days during the previous quarter.
“There’s always a bid/ask gap in commercial real estate transactions, almost always. It could be a small gap that, in a healthy market, you can typically close. What’s happening now is that buyers are starting to do new underwriting on properties based on their cost of debt—and that’s immediate, that’s changing in real time,” said Randel. “Typically, sellers are slower to respond. What’s happening is that bid/ask gap is widening and it’s more difficult to get deals done.”
The median price of deals closed declined quarter-over-quarter, by 6.26%, to $359,000. There was, however, an almost 3% uptick on a year-over-year comparison.
During the same period, the median cap rate on sold properties expanded by 30 basis points, to 6.3%. That cap rate was also 30 basis points above the median asking cap rate of 6.0% in the first quarter.
For the transactions that ended up closing, more than half (56.7%) involved multifamily properties, followed by retail properties in the second spot, at 21.3%. Sales of office and industrial properties trailed far behind, making up just 11.6% and 11.4% of closed deals respectively.