In a recent live event, CrowdStreet CIO, Ian Formigle, and Senior Managing Director of Investments, Anna-Marie Allander Lieb, provided an analysis of the current landscape of commercial real estate (CRE), focusing on the relative scarcity in the market and its general implications. This article summarizes some of the key points discussed, providing insights into current CRE transaction volumes, pricing dynamics, and CrowdStreet’s approach to the CRE market today.
In today's commercial real estate market, transaction activity remains subdued, though there are signs of potential recovery on the horizon. Here’s a closer look at the transaction volumes, pricing trends, and macroeconomic factors shaping the landscape.
The scarcity of the overall CRE market has also translated over to CrowdStreet’s deal flow. With a reduced number of deals being reviewed by our team and an increasingly selective approval process, CrowdStreet is navigating a landscape characterized by both challenges and potential opportunities.
The number of deals we’re reviewing at CrowdStreet has seen a significant decrease as of June 2024. Compared to 2022, the number of deals we’re reviewing at the top of our funnel in 2024 has dropped by approximately 70%. This reduction is consistent with the overall decline in transaction volumes across the CRE market.
Given the general market turbulence, the CrowdStreet Investments team has adopted a more selective approach to deal approvals. The focus is on ensuring that only deals that make sense to us in today’s environment make it to the Marketplace. As of June 2024, the deal approval rate at CrowdStreet has also dropped by approximately 70% from 2022. We believe this decline reflects the reduced quality of deals currently available in the market.
The multifamily sector faces several challenges due to increased financing expenses, higher construction costs, and expanded cap rates, in many cases contributing to decreased valuations upon exit. These factors can often make it difficult to find a multifamily development deal that pencils.
General challenges we’re seeing with these types of projects include:
While the market is generally challenged by the macroeconomic environment, there are situations where a ground-up multifamily project could be considered for the CrowdStreet Marketplace. Generally, we would be looking for the following:
Given the current market where pricing has declined and assets are trading at a discount to replacement cost,9 we believe, generally speaking, acquisitions are currently more feasible than development. Specific sectors of interest to us include:
So, where are the deals? While they remain scarce, we may be witnessing the beginnings of stabilization. This deep dive by CrowdStreet provides numerous insights into the scarcity-driven dynamics of the current CRE market. The commercial real estate sector has faced significant challenges, leading to reduced transaction volumes and generally volatile pricing. As we continue to navigate this environment, deals that meet our Marketplace criteria have become increasingly rare. However, we are beginning to see early signs of CRE market improvement, with the rate of transaction decline slowing and prices showing their first uptick since 2022. Although there is still progress to be made before what many would consider a full recovery, many are looking towards an anticipated first rate cut in September 2024 as a potential catalyst for increased velocity in CRE transactions.
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