Atlanta Business Chronicle – Robert Fransen is always on the hunt for shopping centers and warehouses to add to his commercial real estate portfolio. But he’s making fewer purchases these days.
Fransen, president of Atlanta-based Coro Realty Advisors, is one of many investors held back by elevated borrowing costs. Loan payments now gobble up a larger portion of returns than they did a year ago. Would-be buyers are waiting on real estate prices to plummet before they resume scooping up properties en masse.
“What sellers want for properties feels like what they were worth 12 to 18 months ago,” Fransen said. “Man, the market is not there anymore.”
Atlanta is experiencing fewer real estate transactions across property types, compared to the investment surge during the first few years of the pandemic. In the first quarter, the region posted an 80% year-over-year decline in total sales volume for multifamily and office properties, according to commercial real estate research firm CoStar Group. Volume fell by 44% and 55%, respectively, for retail and industrial properties.
Prices are slowly starting to moderate, both in Atlanta and elsewhere, for most building types. For example, the average buyer paid $179 per square foot for Atlanta retail space in the first quarter, about a 17% year-over-year decline, according to CoStar.
“There are retail buyers at today’s prices, just fewer of them,” Fransen said. “Deals that used to receive seven offers now get three. At the moment, many buyers are all-cash, [of which] there are only so many.”
Fransen estimates that it would take an additional 10% price drop for previous levels of deal-making to kick back up. Some owners will be pushed into considering lower offers for properties with maturing loans, especially if refinancing is not an option, Fransen said.
Despite the slowdown in lending activity, appetite is still strong for retail, multifamily and industrial properties. Atlanta’s growth is straining the supply of places for residents to live and businesses to operate, which investors view as an opportunity for continued rent growth.
“Landlords are asking for one number and the bids are coming in much lower,” Fransen said. “Who blinks first? My money is on the owner. They’re starting to do that a little bit.”
In the first quarter, industrial investors actually paid slightly more for space than the average buyer paid a year earlier. Fransen attributes the anomaly to the recent construction slowdown, which boosts the value of existing, sought-after space. The office sector posted a 34% year-over-year decline in average sales price — the steepest drop among all major asset classes — partially due to faltering tenant demand.
As companies embrace hybrid work and reassess real estate needs, they’re swapping out large workspaces for smaller ones in walkable environments. That spells trouble for aging office buildings, especially those in suburban areas without close proximity to restaurants, shops or other amenities. Lack of interest could accelerate the decline of those properties, opening the door to redevelopment opportunities.
“The stress in office is much more acute,” Fransen said. “Multifamily buyers are waiting for prices to soften. Office buyers are waiting for them to soften a lot.”