IRVINE, Calif. and SILICON VALLEY, Calif., June 19, 2017 /PRNewswire/ — Ten-X, the nation’s leading online real estate transaction marketplace, today released its latest Commercial Real Estate Capital Trends report, which reveals that investment activity decreased during Q1 2017, taking a step backward after two consecutive quarters of growth. Overall transaction volume fell 32 percent from the prior quarter to $90.9 billion, according to Real Capital Analytics – an 18 percent drop from Q1 2016 and 43 percent lower than its late 2015 peak. The decline was not unexpected, as investors have pulled back sharply since the November election due to higher financing rates and uncertainty surrounding future exit cap rates. As a result, total deal volume has now fallen below $100 billion for the first time since early 2014.  

The contraction in the commercial real estate market comes despite a strong labor market and has reached a cycle-low unemployment rate of 4.4 percent. Wage growth is healthy, though the pace of average hourly earnings growth has not accelerated recently, though an increase in the average number of weekly hours worked has helped increase worker pay. Those positives, however, have not been enough to overcome mounting political, monetary and technological questions facing real estate and the economy at large.

“Uncertainty is always among the greatest threats to continued economic expansion and investment, and commercial real estate is currently facing a multitude of questions that threaten to shift segment and market fundamentals,” said Ten-X Chief Economist Peter Muoio. “In addition to a new presidential administration that has yet to signal a clear direction on various issues affecting the economy and commercial real estate, deal flow is being hampered by shifts in Fed policy and political upheaval around the world. Furthermore, investors are exercising caution specifically because of the length of this bull market, as many wonder how long this unusually prolonged recovery can last.”

CRE Transaction Volume Declines in Q1

Deal volume declined in each of commercial real estate’s five sectors during Q1, marking the first time in 11 quarters that transaction volume measured below $100 billion. The apartment sector, which has long paced the market in terms of transaction activity, posted a steep decline of 600 bps from the prior quarter, though the sector continues to make up an outsized portion of deals. Retail and industrial, in turn, each saw their respective shares of total volume increase. The office and hotel sectors had modest declines in volume, falling 130 bps and 50 bps respectively.

Despite the steep decline during Q1, total five-sector volume remains 16.2 percent above its historic 10-year average – an indication that capital markets remain generally healthy. Industrial and retail were the strongest over-performers, notching volumes 30.2 percent and 26.7 percent higher than their averages, respectively. Apartment and office surpassed their averages by 17.3 percent and 14.6 percent. Hotel was the only segment to see its volumes underperform relative to the historical average, posting a first-quarter total 21.3 percent lower than its 10-year average.

Property Pricing

High liquidity levels and solid fundamentals continue to be a boon to commercial real estate property pricing, which is now up 7.2 percent year-over-year as of March, per the Moody’s/RCA Commercial Property Price Index (CPPI). The Ten-X All Property Nowcast — which gauges national pricing through a combination of proprietary and third-party data – remains in a prolonged slump, with pricing contracting slightly in May after an encouraging 1 percent gain in April. That drove pricing to levels 10.2 percent higher than a year earlier, according to the Nowcast, just below its peak of 10.6 percent achieved a month earlier.

The Ten-X CRE All-Property Nowcast showed growth in just two of five sectors, with retail suffering the worst losses at 1.2 percent. Pricing across the struggling sector has now declined during four of the last five months, thanks in part to a spate of negative media coverage following high-profile store closings and downsizings amid e-commerce’s continued encroachment on brick-and-mortar retail sales. After an encouraging April, the contraction brought year-over-year pricing gains down to just 6 percent. Industrial and hotel pricing also decreased in May, according to the Nowcast, falling 0.6 percent and 0.2 percent respectively. Both sectors have been struggling, as industrial has increased just 5.2 percent over the last year, and hotel has gained a meager 2.6 percent since May 2016.

Office pricing rose by 0.3 percent, and is now up 22.3 percent over the last year, though those high annual gains are largely the result of a lackluster early 2016, and the index has actually remained fairly flat over the last seven months. Apartment pricing continues to buoy the CRE market, as consistent pricing increases have boosted the sector’s year-over-year gains to a healthy 15.2 percent.

According to Moody’s CPPI Index, office is the lone sector currently at an all-time peak price index level, and is now 20.5 percent above its prior cyclical peak level. Apartment and industrial have each fallen modestly since setting their own all-time highs during the last few months. While apartment continues its run of consistency, April marked the sector’s first month of sub-10 percent year-over-year growth, after a remarkable 76-month run of double-digit gains. The sector’s pricing is now 53 percent higher than its prior cyclical peak, thanks in large part to increased urbanization, tight housing inventories and rising home prices that continue to drive younger consumers to renting. Retail pricing managed to post modest year-over-year growth despite declines in 5 of the last 8 months, and the segment now stands 2.2 percent off its most recent peak.

Risk Premiums Fall Sharply Across All Sectors

Risk premiums rose slightly in three of five CRE sectors during the first quarter, following across-the-board declines during the final months of 2016. Apartment was the only segment to see a decline, as premiums fell 30 bps to their lowest level since 2008. Office saw risk premiums remain flat during Q1, while retail and hotel each saw modest increases of 10 bps. The largest increase came in the industrial sector, which gained 20 bps, but remains 80 bps below its year-ago level. Hotel maintains the highest risk premiums by far, due to its considerable secular and cyclical challenges, and is the only sector with premiums higher than its historic average.

The universal declines in premiums during 2016’s final quarter came in response to the sharp jump in the 10-year Treasury rate. The rate remained stable at 2.48 percent in Q1 – its highest level since 2014 after prolonged declines. The rise in treasury yields reflects a sense of anticipation of heightened growth and inflation amid the Trump administration and the Fed’s recent interest rate hikes. The Fed has announced its intention to raise rates three times during 2017, and U.S. interest rates remain much higher than international peers, which should continue to encourage the inflow of foreign capital.

Risk premiums in all sectors aside from hotel are now below their 10-year averages, marking a swift reversal from just two quarters ago. This reversal has diminished the buffer within cap rates, leaving valuations far more sensitive to future interest rate moves.

Cap Rates Increase in Four of Five Sectors

Cap rates mirrored the shifts in risk premiums, increasing in the industrial, retail and hotel sectors. Apartment was the lone sector to see rates fall, dropping 30 bps despite treasury yields remaining steadfast. Office cap rates, meanwhile, stayed flat at 6.8 percent. Increases across the remaining sectors were fairly uniform, with industrial seeing the biggest increase of 20 bps. Hotel and retail each saw upticks of about 10 bps. Hotel’s current cap rate of 8.7 percent is easily the highest of any sector, while apartment is far and away the lowest, at 5.4 percent. Hotel also remains the only CRE sector with a cap rate above its 10-year average.

About Ten-X

Ten-X is the nation’s leading online real estate transaction marketplace and the parent to Ten-X Homes, Ten-X Commercial and Auction.com. To date, the company has sold 275,000+ residential and commercial properties totaling more than $46 billion. Leveraging desktop and mobile technology, Ten-X allows people to safely and easily complete real estate transactions online. Ten-X is headquartered in Irvine and Silicon Valley, Calif., and has offices in key markets nationwide. Investors in the company include CapitalG (formerly Google Capital) and Stone Point Capital. For more information, visit Ten-X.com.

 

To view the original version on PR Newswire, visit:http://www.prnewswire.com/news-releases/commercial-real-estate-transaction-activity-in-sharp-decline-ten-x-research-reveals-300475900.html

SOURCE Ten-X