Here at Axia Partners, we pride ourselves on keeping a finger on the pulse of the latest developments in commercial real estate, finance, and economics to make informed decisions and stay ahead of emerging trends. In our ongoing quest to bring transparency and value to our investors, I would like to share some of the topics and stories shaping the commercial real estate investing landscape and provide commentary on how I interpret this information.
When commercial real estate brokerage firms offer predictions on transaction volume, it is often a double-edged sword. On the one hand, these brokerages have a front-row seat to sales activity and thus can provide valuable insight into the pulse of the market. On the other hand, given the fact their bottom line is highly correlated with transaction volume, optimistic forecasts should be taken with a grain of salt. All that being said, CBRE recently announced their anticipation of transaction volume falling 5% in 2024 due to rising Treasury yields and prohibitive capital markets. However, according to Kelli Carhart, CBRE’s leader of Multifamily Capital Markets, multifamily is poised to be an active sector in an otherwise subdued commercial market. Citing an easing in multifamily access to debt capital markets, decreasing supply pressures, and an increase in loan maturity-driven acquisition opportunities, Carhart posits the multifamily sector should remain the dominant commercial asset type in terms of overall investment activity. These prognostications from CBRE coincide with a report from RealPage’s Jay Parsons, which suggests declines in multifamily rent growth appear to be plateauing with a potential for a positive reversal in the first half of 2024. Parsons is quick to note the high degree of variance between markets when talking about rent growth, as rent growth weakness seems to correlate significantly with new supply pipeline size relative to existing stock. Declining rent growth has been a major headwind for multifamily performance and transaction activity as Buyers are reticent to factor growth into their underwriting with so much uncertainty abound, and Sellers remain anchored to stale valuations. In Parson’s words, “it’s still all about supply” regarding rent growth and occupancy. Demand for apartments is strong across all markets, but in those markets where supply outstrips demand, suppressed rent growth and increased vacancy will take longer to normalize.
High Level Take-Away: Commercial real estate deal volume declined 8.5% quarter over quarter in Q3 but came in 6% higher than in Q1 of 2023. While transaction activity appears to be stabilizing, it is still down 38% from the record volumes experienced in 2020 and 2021. These headline figures miss the diverging trends among different property types, however, with multifamily remaining relatively more active and dominating 34% of all commercial investment activity in Q3. Diving deeper, there is, and certainly will be, further divergence within the multifamily sector over the coming quarters as geographic markets with more favorable supply/demand dynamics experience stronger and more stable rent growth and occupancy, driving investor attention and activity.
If you’re searching for a case study in loaded headlines, look no further than Commercial Observer’s recent story on the “Demand For Big-Box Warehouse Space Returning to Pre-Pandemic Levels: Report.” This headline would be overwhelmingly positive (and straightforward) if the focus were on office or retail properties, which have experienced drastic and sustained spikes in vacancy and performance across legacy and big-box assets, respectively. The narrative is slightly more nuanced when discussing industrial properties. Driven by growth in e-commerce and the ongoing evolution of global and national supply chains, big-box industrial properties witnessed a boom in demand from occupiers and investors throughout the pandemic. With this in mind, a return to pre-pandemic levels of demand indicates a softening of demand and occupancy relative to the hyper-competitive industrial market of the last several years. A negative headline is not, however, as this return to more “normal” demand levels should help big-box industrial assets find a more sustainable equilibrium regarding occupancy, lease rates, and rent growth. This dynamic should drive healthier absorption among the waves of new supply entering the market.
High Level Take-Away: Big-box industrial properties, ideally suited to distribution and logistics occupiers, have been in extremely high demand since the onset of the pandemic. This supply/demand imbalance has spurred a wave of new construction and has driven vacancy to near zero in many markets. As warehouse properties exit the supply pipeline, we are now seeing occupancy and lease growth return to more normalized levels, which should help accelerate new construction stabilization and the absorption of millions of square feet of new warehouse product. Personally, I do not see this newfound equilibrium lasting for any extended period of time as supply/demand imbalances are likely to resurface in H2 2024, driven by sustained high levels of demand coupled with a major kink in the warehouse supply pipeline.
Portfolio Manager - Director of Investment
After receiving his undergraduate degree from Dartmouth College, David structured and traded Mortgage Backed Securities and other financial instruments in EverBank’s Portfolio Management and Capital Market’s groups. David went on to receive an MBA from Vanderbilt University after which he worked as an Advisor for Credit Suisse and then Goldman Sachs. Wanting to work with larger institutional clients, David transitioned into a key role on Goldman’s Hedge Fund Strategies team. Prior to joining Axia, David sought to enhance his commercial real estate exposure by partnering with one of Colliers International’s top Investment Sales teams in the Utah market. As Axia’s Director of Investment and Portfolio Manager, David spearheads the group’s efforts around acquisitions and dispositions, portfolio construction and management, investment strategy, market/industry research, capital markets activities, and thought leadership.