Rising interest rates and an anticipated recession in the latter half of 2022 appear to have caused concern among investors, as the total volume of deals saw a steep decline, according to a recent report.
According to CoStar Group’s Real Estate Data Update for April, the total volume of transactions dropped to just over $7 billion in the first quarter of this year, 55% below deal activity in Q4 2022. Q1 results were also 55% lower than a year ago.
As the year progresses, two opposing market forces will be on display. The anticipated slowdown in consumer and corporate spending is likely to hurt hotel revenues and operating profits. This will affect valuations that buyers are willing to underwrite, which could contrast with the values ascribed to properties by sellers.
In such a situation where the “bid-ask” spread is wide, there are fewer transactions until either seller accepts a lower price or buyers get comfortable with high valuations. A continuing disconnect between buyers and sellers has a negative effect on the total volume of sales.
Many debt maturities, however, have been extended from earlier years into this year. This year may see the end of the recent loan accommodations.
Hoteliers that need to refinance their debt may be forced to accept new loans with substantially higher interest rates.
Room rates are still more expensive than a year ago, but the increases are no longer in double digits. Room rates jumped 14.8% in January. However, in a sign of slowing down, preliminary room rate growth in March was at 8.1. As inflation controls, room rates are projected to ease.
OFFICE LEASING TRENDS
Both vacancy and availability peaked at 12.9% and 16.4%, respectively. Vacancy has risen by 333 basis points since the end of 2019, surpassing its peak during the Great Recession.
Despite a 5% rise quarter-over-quarter, new leasing volume was 16% below its pre-pandemic average. Preliminary data suggested that the average size of new leases has decreased as it did during the first 18 months of the pandemic. This may indicate that total space requirements are decreasing as tenants continue adapting to new ways of working and economic headwinds that have led to layoffs and reduced hiring.
Occupied space per office-using worker was at a record low, down 12% from 2015.
INDUSTRIAL LEASING TRENDS
Tenant demand for space still remains positive but is slowing down. U.S. industrial absorption, representing the change in industrial space used by tenants and owner-users in the country, was favorable but declined in this year’s first quarter to 56 million square feet. This was only half as strong as last year’s first quarter and much more aligned with pre-pandemic absorption than the high absorption figures in 2021-22.
A total of 120 million square feet of new industrial space was completed construction in the first quarter. With supply outperforming absorption, the U.S. industrial vacancy increased from 4% at the end of 2022 to 4.3% at the end of Q1 2023.
While the U.S. industrial vacancy rate remains tighter than at any point recorded during the 2010s decade, Q1 2023 brought the largest quarterly increase in vacant industrial space since 2009, driven almost entirely by completions of unleased industrial projects within the record wave of new industrial developments that will continue to bring a significant volume of new projects to completion through the rest of the year.