Signs are emerging that the market is bottoming, and sales volumes will increase moving forward. There is a lag between offerings and closed transactions, so this recovery is likely another quarter away, according to a market update report from Colliers.
Multifamily volume increased slightly quarter-over-quarter, suggesting it has bounced from its low point, Colliers said, while “the tailwinds of demand and undersupply of housing remain strong drivers of a multifamily investment thesis.”
Nonetheless, it remains the top asset class for volume, though it has seen the most significant pullback in activity year-over-year.
However, San Francisco and San Jose are trending higher volume-wise.
Office sales activity picked up marginally in Q2, but levels remain below pandemic-era lows.
“While investors are avoiding this asset class, savvy ones have opportunities to capitalize on the market dislocation,” Colliers said.
Investors are targeting stabilized returns in the 10% to 12% range. Some are acquiring assets on a price-per-pound basis. Central business districts have declined the most in price due to “higher uncertainty.”
Average cap rates are at 7.1%, the highest they have been since 2013.
Transactional cap rates are settling closer to 8%-10% for stabilized, non-trophy assets.
“High vacancy properties are trading at substantial discounts to prior valuations due to a lack of income,” Colliers reported.
Industrial volume has normalized, following a strong run. Relative to other asset classes, industrial is the most liquid, with volume topping office and retail combined in the quarter, according to the report.
In Q2, volume was 11% higher than the previous quarter.
“Strong fundamentals and significant mark-to-market rent upside continue to attract investors,” Colliers said.
Los Angeles and the Inland Empire now boast first and second place, with volume down 17% and 10%, respectively, as Dallas fell from No. 1 to No. 5 after it dropped by 70% in the second quarter.
Retail is ahead of pandemic-era lows, coming in at $9.5 billion for the quarter as cap rates have been more stable across retail than other asset classes, Colliers said.
“Despite decades-high inflation, growth has consistently outperformed expectations, and retail spending has been robust,” according to the report.
This will last as long as the US stays out of a recession, Colliers said.
Hospitality is overperforming, with price appreciation quarterly and annually, per MSCI. Travel demand remains robust, propping up fundamentals and driving RevPAR and ADR.
Nonetheless, its sales volume overall is the lowest among CRE asset classes at $5 billion, which is below its Q1 number.
“Hospitality offers compelling fundamentals, with daily rates mitigating inflation as opposed to long-term leases,” Colliers said. “Financing constraints are significantly reducing near-term supply additions. Lodging remains a unique asset class that’s performed well through a volatile market.”