Commercial property deal volume has been stuck in low gear since interest rates started their march upward last year, and the lack of deals has stalled a reset in valuations, especially for the beleaguered office sector.

But as office owners look to get what they can this year, that reset may be underway, The Wall Street Journal reports, with a particular focus on office properties in New York.

During Q1 2023, investors acquired about $489.5M in Manhattan office assets, the lowest volumes since the pit of the Great Financial Crisis in Q4 2009, according to MSCI Real Assets data. As sellers are more willing to accept lower prices, however, deal volume will probably rise.

“We’re starting to see a thaw and more product coming to the market,” Eastdil Secured Managing Director Gary Phillips told the WSJ.

For example, Silverstein Properties is selling a building on Fifth Avenue for a loss, and investment giant Blackstone likewise sold its stake in One Liberty Plaza for less than it spent.

Nationwide, CBRE predicts deal volume for most asset classes, not including office, will revive toward the end of this year. Until then, there will be downward pressure on valuations because of the current economic climate.

“[The] current uncertainty presents a brief window of opportunity where lower asset pricing is available before the anticipated market recovery begins,” CBRE said in a recent report.

As for the office sector, CBRE expects “further significant distress in the office sector,” but even so there will be some opportunities, as investors will seek to fill the funding gap for high-quality assets.

The squeeze on valuations is particularly acute for office properties, but that isn't the only asset class facing a variety of negative factors, according to the Financial Times. Higher interest rates mean that buyers are demanding higher yields when acquiring properties, which is putting downward pressure on values.

Also, financing for most property types has grown scarce, as U.S. banks face their own crisis, and debt markets are distorted. Even in the healthiest sectors like apartments, industrial and life sciences, rental growth is slowing.

Roughly $1T in CRE loans will be due over the next 18 months, and with refinancing difficult or impossible for many of them, the underlying assets will reprice at lower levels, FT predicts.