Ten-X: CRE Investment Activity Down 9.6%

Michael Tucker mtucker@mba.org

December 14, 2017


Commercial real estate investment activity fell 9.6 percent from a year ago, reported Ten-X, Irvine, Calif.

Real Capital Analytics, New York, said third quarter transaction volume equaled $109.5 billion, up slightly from the second quarter but down compared to both year-ago and cyclical peak figures.

"In the midst of continuing economic expansion, the moderation in commercial real estate capital markets is striking," the Ten-X Commercial Real Estate Volume & Pricing Trends report said. "Much of the sector is suffering from stagnation in both deal volume and pricing due to new supply dampening net operating income growth and a pricing expectations gap between buyers and sellers."

Of the five market sectors, only apartment and industrial showed improved deal volume from the previous quarter, Ten-X said. Losses across the hotel, retail and office sectors curbed apartment and industrial sector gains, pulling overall investment activity to a "modest" 3.2 percent increase from the second quarter.

Continuing public policy uncertainty is weighing on commercial real estate capital markets because pending tax reform proposals could have "serious" repercussions for the housing market, corporate tax rates and pass-through income, the report said. It noted while the Federal Reserve will likely continue raising interest rates and reversing quantitative easing, credit spreads have thus far remained extremely narrow, while interest rates have been stable in the 2.0 percent range.

"Investors recognize the advanced age of this economic expansion and many are wondering when it may be coming to an end," Ten-X Chief Economist Peter Muoio said. "With sellers holding their ground, commercial real estate pricing expectations are diverging, which led to a third quarter marked by tepid deal volume and pricing."

Risk premiums--cap rates minus the risk-free Treasury rate--remained largely unchanged in the third quarter with four of the five sectors seeing sub-10 basis point movement, the report said. Office and apartment risk premiums remained flat while industrial edged up 10 basis points and hotel ticked down 10 basis points. The retail sector saw the only risk premium change exceeding 10 basis points, falling 30 basis points to 370 basis points.

While all five sectors are trending more than 100 basis points below their cyclical highs, the hotel sector has seen risk premiums drift back up near its 10-year average, Ten-X said. "With slowing occupancy and room rate growth diminishing, investors' rate of return and cyclical tides shifting against the sector, investors are showing less confidence in returns on hotel properties."

The other component of cap rates, 10-year Treasury rates, also remained unchanged since the second quarter at 2.2 percent. Though that places them 60 basis points higher than a year ago, the Fed has signaled it intends to hike rates again before the end of 2017, Ten-X noted.

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