After seeing record growth in the commercial real estate investment market in Q1 of 2022, especially in retail and multifamily sectors, investment volume declined by 57% YoY in the first quarter of this year. Total commercial real estate investment in the U.S. dropped from $180.1B in Q1 of 2022 to $77.9B in Q1 of 2023, according to a recently release CBRE report. Rising interest rates, inflationary pressure, economic climate, and geopolitical concerns have had an impact on the investment volume.
Multifamily continued to lead other asset classes for investment. However, it saw a 64% YoY decline from $67.9B to $24.7B. Other asset classes also saw a significant reduction in investment volume. Industrial, retail, office, and hotel dropped by 55%, 28%, 69%, and 55%, respectively. Industrial and logistics were the second most-preferred asset class. The current demand for housing and warehouses for the e-commerce industry has ensured multifamily and industries and logistics asset classes outperform other asset classes.
Chief Economist at the National Association of Realtors, Lawrence Yun, recently said apartment, industrial and retail sectors would help keep the industry relatively stable. He predicted that the performance of commercial real estate markets would vary across the country, driven by job gains. He added that the office market would continue to see a rise in vacancy rates due to declining demand, and the apartment sector would see a minor increase in vacancy as more supply is added to the market.
The decline in commercial real estate investment did not happen only in the U.S. According to MSCI Real Assets, investments in European commercial real estate declined to its lowest in 11 years. The office asset class, which is Europe's largest real estate sector, plunged to the lowest volume in 13 years of 10.8B euros (~$11.94B). Paris overtook London to become the most active investment destination in the region. Industry experts have been vocal about commercial real estate causing the next financial crisis, but the exposure of European banks to the sector is less compared to banks from the U.S.
For the same time period, commercial real estate investment volume in Asia Pacific declined by 30% YoY, according to real estate consulting company JLL. Stuart Crow, CEO of Capital Markets at JLL Asia Pacific, said liquidity risk is well contained in the region and resumption of activity would begin soon. Japan recorded $8.9B in investment activity, a 4.7% YoY increase, and outperformed other regions. China's investment volume saw a 17% YoY decrease, with limited activity outside Shangai. Sticking to the trend in other parts of the world, investment in office assets class plunged from $17.3B to $12.7B. The number of deals above $100M in the industrial and logistics assets class diminished, leading to a 24% YoY fall.