One of the most important components in our research process is a discussion of market activity. It’s an opportunity to participate in healthy debate with brilliant and passionate real estate professionals about what is occurring in the market and what it all means.
I would argue that facilitating these discussions are one of the most important aspects of what CBRE Research does. These are opportunities to share and build market knowledge on behalf of our clients. While market numbers communicate what is happening, these discussions help us to understand the more important question of why?
Invariably, the conversation around either a flurry of activity, or lack thereof, eventually hits the familiar tone of seasonality. Here are common quotes we hear:
- “It’s vacation season, activity is slow”
- “Deals are hard to get done when everyone is home for the holidays”
- “Our clients want to wait until the next fiscal year to get this deal done”
- “The new tax year is coming up and we want to get this transaction complete”
While there is undoubtedly some truth to these individual claims, the reality is this type of explanation is easy. It feels nuanced and in some cases and can make real estate practitioners feel good about changes in activity. If activity is slowing, it feels better to point to something as innocuous as the date to shoulder the blame rather than an actual change in market conditions.
So, that raises the question, what kind of seasonal effects are experienced in commercial real estate? Do things slow down over the summer? What about over the Thanksgiving and Christmas holidays? Or is it the reverse as real estate professionals look to get transactions complete before the end of the year?
To help understand the seasonality of commercial real estate, we looked the monthly distribution of a database of over 5.1 million transactions in a 13-year period from 2004 to 2016 to identify which months experience an outsized share of transactional activity. To help account for the distribution of weekends in a given month, we converted each month of transactions to a rate of transactions per weekday.*
Transactions Per Day By Month
Some of the more interesting findings:
- The seasonality of leases and sales are different.
- The biggest month for sales is December. It has little impact on leasing activity. Because the tax implications of sales are more pronounced that leases, new accounting rules aside, this lends credence to the commonly held belief that buyers and sellers are often incentivized to complete sales during a given calendar year.
- While there does appear to be a slowing of activity during the “holiday season”, it is little more than 5% off the historic trend, which would probably go unnoticed on a market-by-market basis.
- If the combination of Thanksgiving, Hanukah and the Christmas Break have a marginal impact on transaction activity. In contrast, the month of February appears to present a consistent lull in activity, with a 17% drop in activity on a per workday basis versus the average rate. This is consistent for both sales and leases. If there is a holiday that appears to interrupt commercial real estate activity, it may be Valentine’s Day.
So, why is this important?
Well, while transaction activity can be measured monthly, it is most often quantified on a quarterly basis. Fortunately, the seasonal effect of specific months is largely eliminated when viewed quarterly. While February is an outlier in terms of low activity, March is consistently among the most active.
Transactions Per Day By Quarter
For leasing activity, there does not appear to be a significant variation from quarter to quarter in terms of seasonality. For sales activity, while the fourth quarter is strong, the other three quarters are largely consistent.
All this boils down to one likely fact: when trying to answer the question why, while it may be tempting to chalk up slowing market activity to seasonal fluctuation, with the specific exception of the end-of-year sales push, it is most likely not true, especially when it comes to leasing velocity.
By Brian Reed, Research Operations Manager, Southeast Research, CBRE.
* One of the allures of commercial real estate over residential real estate is that while residential real estate occurs largely at night and on weekends, commercial real estate largely occurs during business hours. Sure, there are always the big critical projects that require burning the candle on both ends and working weekends, but that is the exception and not the norm.