Deal Volume Suggests CRE 'Resilience'

Michael Tucker

June 07, 2018

Commercial real estate transaction volume totaled $107 billion in the first quarter, down from late 2017 but up compared to a year ago, reported Real Capital Analytics and Ten-X.

Quarter-over-quarter, deal volume dropped 14 percent compared to a strong fourth quarter, but first-quarter activity rose 6.7 percent compared to first-quarter 2017 as the industry started the year stronger than in 2017.

"While total deal volume is lower than the third or fourth quarters of 2017, it is not unexpected as transaction volume is historically lower in the first quarter of the year since investors seek to close deals before the end of the calendar year," said Ten-X Chief Economist Peter Muoio. "While some have anticipated the bottom falling out of the market for more than a year, the first quarter's  year-over-year uptick in deal volume suggests resilience in the commercial real estate sector."

Buyers and sellers still have differing pricing expectations, especially as interest rates have risen, Muoio noted. With supply increases looming in the apartment, hotel and industrial sectors, buyers are wary of high price points and tight cap rates while sellers are demanding the aggressive valuations common in recent years. "Even as some owners continue to demand the high valuations of yesteryear, a fair amount of market participants have recognized the new realities and found enough common ground to get deals done," he said.

Transaction volume in the apartment and office sectors saw the most substantial quarterly declines, dropping by about $12 billion and $9.5 billion, respectively, Ten-X reported. These losses were too large to be offset by modest gains in the hotel and industrial sectors equaling $4.5 billion and $2.2 billion respectively. A $2.4 billion loss in the retail sector further weighed on overall transaction volume.

The continued increase in Treasury yields has not yet shown a significant effect on cap rates. Most sectors remain within 10 basis points of their fourth-quarter levels; only the retail sector saw noticeable movement with a 30 basis point increase in the first quarter.

"Continued economic growth and incipient inflation are pushing interest rates up," Muoio said. "While the current cap rate stability and the year-over-year increase in deal volume are positive signs, commercial real estate investors are faced with the legitimate concerns of higher costs of capital and tightening lending standards. While each property type and region provide a range of micro factors worth considering, it is understandable that this uncertainty has made investors cautious and pulled property pricing down on a year-over-year basis."

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