The U.S. commercial real estate market is in a slump, with investment sales down during Q3 2022 compared with both the previous quarter and a year earlier, according to a new report by Colliers.

Investment sales volume for the third quarter totaled just over $162B, down from $178.8B during the second quarter, and down 19% from the $200B in deal volume during the third quarter of 2021, the report found.

"Today's market conditions are abnormal," the report says, noting that liquidity challenges for commercial real estate usually happen because of weak fundamentals or a banking crisis. Neither of those is driving the CRE market down this time, however.

Rather, higher borrowing costs — a result of the Federal Reserve's efforts to put a lid on inflation — have created a wide bid-ask spread on potential deals, and many buyers are waiting for interest rate stability before pulling the trigger on deals.

Also, "stubborn inflation, geopolitical concerns, a strong U.S. dollar and fear of a recession have the market spooked, despite tremendous amounts of uninvested capital," the report notes.

Investors remain most interested in multifamily, with $74.1B in deals during Q3 2022. Still, deals are falling through even in that sector, the report said, as higher borrowing costs make the sector's record-low cap rates untenable. Also, inflation is driving higher operating costs in the sector and squeezing cash flows.

In the other darling sector of recent years, industrial, higher borrowing costs and low cap rates are pushing deal volume down, though Prologis’ acquisition of Duke Realty will give Q4 activity a boost, Colliers said.