UNITED STATES (CoStar) – April 23, 2020 – In the second month of the U.S. economic shutdown, commercial real estate buyers and sellers have canceled pending sales and contracts at a pace never before recorded by CoStar. More than 17% of deals that were scheduled to close in April were called off.
The canceled deals through the first three weeks of the month show the enormous impact the coronavirus pandemic is having on investor sentiment. And the percentage, not yet a reflection of a full month, is likely to increase. For comparison’s sake, the amount more than triples the previous full-quarter high of 5.6% in the first quarter of 2008 as the Great Recession was kicking in.
About 330 deals have been nixed for the month as of April 17, according to CoStar data, which shows asking prices for 289 properties that add up to about $506 million. Without all the prices listed, the total amount stands to be higher. Los Angeles saw the most deals called off, at $42 million, followed by Atlanta at $39 million, Chicago at $36 million, Boston at $31 million and San Diego at $24 million.
Individual property owners backed out of the largest percentage of deals — at least 40 of them totaling $137 million, or about 27% by dollar volume. Regional developers accounted for the second-highest total at $49.5 million.
“I’m certainly not surprised by how large these numbers are,” said Robert Calhoun, a managing director and senior economist for CoStar. “I don’t know how a buyer or lender could get comfortable underwriting any deal given the uncertainty on future cash flows.”
“We just don’t have any idea right now how bad the recession will be, how long it will last, and what shape the recovery will take coming out of it. And the effect on real estate cash flows is even more uncertain,” Calhoun added. “How will it translate to changes in occupancy and rents going forward when 25 million jobs are lost in a single quarter?”
By property type, hotels led canceled deals. Investors called off 32% of scheduled hotel property sales with asking prices totaling more than $41 million. The dollar volume of canceled deals was higher than the total of $29 million in sales completed so far this month. That is the only property category in which that disparity occurred.
The dropped hotel deals are just another sign of that sector being in the bull’s-eye of the impact from the spread of the pandemic, said Jan Freitag, senior vice president of lodging insights for STR, a CoStar Group company that tracks hotel data around the world. CoStar is the publisher of CoStar News.
“Corporate transient and leisure demand has almost completely dried up,” Freitag said. “Buyers are wondering what a new normal with regards to cash flow looks like and are deciding to remain on the sidelines until guests return.”
“It will be a while until buyers and sellers will be able to agree on how to underwrite the 2020 results into the future,” according to Freitag. Million-dollar deals continue to close, however, indicating that the market has not come to a complete halt, he added.
Notably, the value of dropped deals continues to rise. Since the totals were compiled, Xenia Hotels and Resorts said it terminated an agreement to sell the 492-room Renaissance Austin Hotel in Austin, Texas, for $100.5 million. The deal did not close by an extended deadline and was canceled. Xenia said it held on to the unnamed buyer’s $2 million deposit, which was previously released from escrow.
CoStar’s dropped deal count in April for other property types is as follows:
- Multifamily: 57 deals, 19.1% by deal volume.
- Miscellaneous: 21 deals, 18.4%.
- Office: 59 deals, 13.9%.
- Land: 70 deals, 13.1%.
- Retail: 80 deals, 12.6%.
- Industrial: 35 deals, 8%.
The dropped deals will likely further slow the volume of U.S. property sales in the second quarter. The number of new sales tracked by CoStar from county government offices across the country are only about a quarter of what was received in the first two months of the year.