2024 Q3 Market Report

Commercial sales have seen a profound lull since the end of 2022, the year that brought steep interest rate increases and ended an era of historically cheap financing. Since then, sellers have not budged much on price, while most buyers have seen their purchasing power undercut by higher interest rates. As a result, sales transactions during 2023 and so far in 2024 are down 63% compared to the prior five-year average. In Q3 there were 14 commercial sales completed totaling $43 million, a very slow quarter by recent standards. All told, 2024 is on pace for the lowest annual dollar volume since 2009.

Investors appear to have withdrawn from the market even further, possibly holding out for interest rate cuts in coming months. Uncertainty surrounding the Presidential election has also had a cooling effect on real estate investment. There were only four investor purchases in Q3, most notably the “Bottle Shop” retail property at 1200 Coast Village Rd in Montecito by a 1031 Exchange buyer. Another investor acquisition was the 9,800  SF industrial building at 5387 Overpass Rd. By comparison, there were 10 owner-user purchases in Q3, including the 11-acre St. Anthony’s Seminary property at 2300 Garden St, auctioned for $16.7 million in July.

The impact of higher interest rates on sales activity hits hardest in the upper price ranges, as fewer buyers have been willing or able to secure big loans to finance a purchase. The dollar volume of sales priced over $5 million has dipped nearly 80%, compared to the prior 5-year average. The first three quarters of 2024 yielded only seven transactions over $5 million, two of which were hotels, and a third was the education property at 2300 Garden St noted above. The remaining sales over $5 million were two industrial and two retail properties. There were no office sales above that price threshold.

On the other hand, sales below $5 million have followed a gentler decline, trending about 15% below the 5-year trends for both transactions and dollar volume. Properties in this price tier are obviously easier to finance and/or purchase with cash, making the barriers to ownership less imposing.

Office property typically generates more dollar volume than other commercial types, but there haven’t been any sizeable office sales, and dollar volume to date is only $17 million. Meanwhile, retail and industrial sales have produced $55 million and $32 million, respectively, which are both about 22% below their 5-year averages. Most of the retail sales have been in the Funk Zone and downtown Santa Barbara, including four buildings on the State Street corridor.

Looking ahead, there is a willing and growing supply of sellers in the market. The number of properties for sale expanded by 33% during the past 6 months to reach the highest level in two years. In fact, 35% of the current inventory came to market during the third quarter. As for demand, the Federal Reserve’s recent interest rate cuts— the first in more than four years—have given buyers cause for optimism. With potential for lower interest rates ahead and the election in the rearview mirror, commercial sales may be poised to regain momentum during 2025.

Read the full report: https://www.hayescommercial.com/2024/10/2024-q3-report/