Transaction Volume Recovers Slightly in August

Good morning,

Transaction volume recovers slightly in August; hotel transaction volume drops to $6B, down 45%; and Sun Belt office markets see jump in vacancies. Let’s delve into today’s topics.

📈 Market Update

🏢 Transaction Volume Recovers Slightly in August

August brought a modest rebound in commercial real estate sales, with volume up 20% from July across sectors. But the market remains significantly depressed compared to last year, down 61% annually. Though property types like multifamily, industrial, and retail saw monthly gains, sales still lag 2022 levels by 30-74%. With deal volume skewed toward smaller trades, large transactions over $100M remain scarce.

Rising Rates Bring Further Uncertainty:
The surge in 10-year Treasury rates to over 4.7% is putting pressure on commercial real estate, raising borrowing costs, lowering returns, and slowing transaction activity. As rates rise, property prices and valuations are declining, with little prospect of "cash-out" refinancing. Investors face negative leverage and yields below the risk-free Treasury rate. Uncertainty lies ahead until lending rates stabilize and investment capital flows more freely again, and real estate markets are slower to adjust pricing than equity markets.

🏨 Hotel Transaction Volume Drops to $6B, Down 45%

Third quarter U.S. hotel sales dropped 45% from last year to $6B as higher interest rates curbed deal volume. Transactions slowed amid valuation gaps and tightening underwriting. But luxury deals like Blackstone's $800M JW Marriott sale point to enduring investor appetite for top-tier assets. Though a recessionary outlook clouds the horizon, selective investing continues, especially for resilient luxury and upper-upscale hotels less exposed to a downturn's impacts.

Standalone Branded Residences on the Rise:
Demand is growing for residential properties that deliver luxury hotel living without an on-site hotel, sparking major brands like Marriott, Hilton, and Four Seasons to expand their standalone branded residence offerings. These prestigious developments let homeowners access amenities like concierge service and private dining while avoiding the risks of hotel development. Though most branded residences remain co-located with hotels, the segment provides brands new avenues for growth.

📉 Sun Belt Office Markets See Jump in Vacancies

While major coastal cities like San Francisco and New York dominate headlines for rising office vacancies, fast-growing Sun Belt markets Charlotte and Nashville have also seen outsized increases. Though still below the national average, vacancies in both southern boomtowns jumped over 5 percentage points as copious new supply outpaced demand. The construction wave illustrates developers' pre-pandemic bets on continued Sun Belt expansion, while tech hub dynamics explain the imbalance in legacy markets. But with occupiers cautious everywhere, overbuilding poses challenges even in burgeoning regional markets.

✍️ Further Reading

• Largest US Banks Grapple With Worst Write-Offs in Three Years (BBG)

• Commercial Real Estate Woes in Canada Are Worsened by Tax Gap (BBG)

• The Californization of the Texas Housing Market (WSJ)

• KKR and Carlyle Take No Carry on New Private Credit Funds (BBG)

• Monthly Snapshot: A CRE & Structured Finance Review for September 2023 (Trepp)

• The Cumulative Impacts of Higher Interest Rates (MHN)

• Goldman Sachs Starts $500M Dallas Campus (RD)

📊 Chart of The Day