Commercial real estate investment plummeted to the lowest level since 2012 last year

Investment in US commercial real estate dropped by 52% last year, CBRE says.

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Commercial real estate investment in the US last year dropped 52% to the lowest level since 2012.
New York led with $33 billion, trailed by Los Angeles with $30 billion in investment. 
Offices logged the biggest decline as the sector continues to struggle with COVID-era remote work trends. 

The US commercial real estate market saw a steep drop in investment last year, with capital flows into the market plummeting by more than 50% to the lowest level since 2012. 

For the fourth quarter, investments in commercial properties plunged by 44% on an annualized basis to $81 billion. That brought the full-year investment total to $348 billion, a 52% decline from 2022, according to CBRE. The figure is only slightly above the $340 billion recorded in 2012.

CBRE noted a 91% year-over-year drop in direct real estate company investments to $1.4 billion in Q4, citing increased financing costs. Individual property sales also fell by 36% to $68 billion, while bundled portfolio sales decreased by 45% to $12 billion.

New York took the lead with $33 billion in investment, followed by Los Angeles at $30 billion. 

By property type, multifamily and industrial assets notched investment volumes of $26 billion and $19 billion, respectively. 

The real laggard by investment volume was the US office sector, which only saw $14 billion in investment in the fourth quarter, a decline of 33% from the same period in 2022. 

The persistent work-from-home dynamics have boosted office vacancy rates to a 30 -year high of 18.6%. Office values have seen the steepest decline among property types, with CBRE noting that offices saw a 16% year-over-year price drop.

Billionaire Starwood Capital CEO Barry Sternlicht warned last month that the office meltdown will result in $1 trillion of losses and other real estate experts have said the market could take years to recover its pre-pandemic value. Capital Economics researchers last month predicted that this year would see the completion of a 20% peak-to-tough decline in office values. 

The dimming outlook for commercial real estate —offices in particular — is linked to the tighter financing conditions that many commercial landlords now face. As billions come due on commercial properties each year, owners must grapple with refinancing existing debt at higher interest rates. While rates are expected to come down in 2024, office landlords will still struggle with elevated vacancy rates. 

One solution has been to convert offices into residential properties, though not all buildings are suited for it. Since 2021, the amount of office-to-residential conversions has soared 357%.