In recent years, the unprecedented price appreciation for industrial property has masked other lesser-watched trends in the capital markets, specifically the number of closed transactions. While the aggregate value of assets sold and their record-setting prices are widely known, the dramatic slowdown in deal flow quietly moving markets today suggests that all may not be well.
Industrial transaction counts, as measured by the number of property sale closings, have fallen sharply since the first quarter of 2022 to levels not seen since late 2012. Over the past seven quarters, the number of trailing 12-month industrial closings has fallen from 29,728 at the peak during the first quarter of 2022, to 18,258 in the third quarter of 2023.
A look back at industrial property transaction trends during the Great Recession could be instructive. After reaching a high in 2007, transaction counts for industrial property sales plunged by 49% before bottoming in 2009.
In the current cycle, closing volumes were down 39% in the third quarter compared to the highs seen in 2022. Were the market to experience a comparable peak-to-trough decline in sales volume in 2024, transaction counts could land near 15,300 closings, similar to the number of industrial property sales seen in the first quarter of 2007.
The drop in transaction count levels has hardly been noticed, however, as the aggregate dollar volume of trailing 12-month transactions far outpaces industrial property sales in the pre-COVID era. Even after accounting for a 41% decline from the peak, transaction dollar volumes for the third quarter of 2023 are still 12% higher than the strongest quarter before the pandemic.
The main driver behind the surge in volume has been the spike in industrial pricing, which has increased by 53% during the two years following the initial pandemic-related shutdowns. Despite a recent pullback in pricing, industrial property values are still up by 45% since the first quarter of 2020.
Considering that the drop-off in the number of sales has been more dramatic and shorter-lived in the current environment than during the Great Recession, it could still be several more quarters before the number of property sales settles and the market resumes its normal cadence.
It may be helpful to remember that the prior economic cycle saw a 38% decline in the value of industrial property after the number of sale transactions evaporated. So far today, the market has barely given back low double-digit price gains from the run-up in valuations, suggesting there could be more risk in pricing than current transaction volumes suggest.
Source: Chad Littell, MMCG, CoStar