IRVINE, Calif. and SILICON VALLEY, Calif., March 31, 2016 /PRNewswire/ -- Ten-X (formerly Auction.com), the nation's leading online real estate marketplace, today released its Q4 2015 Commercial Real Estate (CRE) Capital Trends report, which reveals that CRE capital markets activity – especially how it pertains to transaction volume – reached a new cyclical high in Q4. The total deal volume for the five major CRE sectors reached $150.3 billion, which amounts to a 20.2-percent increase from a year ago. The Q4 sales figures represent the highest quarterly total since the recession hit and a sign of recovery after a sluggish previous two quarters.
"While a slowdown in CRE was evident after we saw drops in sales volume across the second and third quarter of 2015, a fourth quarter spike in deals lends evidence to increasing confidence in the U.S. real estate market," said Ten-X Chief Economist Peter Muoio. "All five CRE sectors saw quarterly increases in deal volume, thanks to the strengthening U.S. dollar and the typical fourth quarter rush among investors to complete deals by the end of the year."
CRE Deal Volume
Sources: RC Analytics, Ten-X Research
The Q4 spike in sales volume brings the five sectors near their respective pre-recession peaks. Though all five sectors saw quarterly increases in Q4 deal volume, there were some variances. The industrial and apartment sectors saw pronounced outperformances of 320 bps and 680 bps, respectively in Q4, with industrial deal volume growing 65.8 percent and apartments by 46.9 percent. Even though it was up from Q3, the office sector dropped 1.7 percent from a year ago, as did the retail sector (by 15.6 percent).
The apartment, industrial, hotel and office sectors each hit all-time pricing peaks, while retail prices were 1.6 percent below their pre-recession peak. Prices were higher than their prior cyclical peaks for apartment (35.3 percent), industrial (3.4 percent) and office (20.4 percent). The office sector enjoyed pricing growth even with a split between the growth of central business district (CBD) assets and suburban subsets: CBD office was 51.3 percent higher than pre-recession peak pricing, while the suburban office subset remained 8.7 percent below its prior cyclical peak.
Aside from the hotel sector, the remaining four sectors continued seeing year-over-year price growth stabilizing between 10 percent and 20 percent. The Ten-X industrial nowcast report in particular showed extremely strong valuation gains in late 2015 carrying over to January 2016.
Year-Over-Year CRE Pricing Changes
Sources: Moody's, RC Analytics, Ten-X Research
Risk Premiums Decreased in Q4
Ten-X's calculations show risk premiums decreased in Q4 from Q3 across all five CRE sectors except hotel, where the premium increased slightly. The hotel sector's risk premium is the highest of the five CRE sectors at 6.3 percent. This could potentially leave hotel cap rates with the lowest exposure to rising interest rates. Due to the decline in risk premiums across the four remaining sectors, risk premiums as a whole were lower than their year-ago levels in all sectors except hotel, which saw a 46 bps bump from a year ago.
Premiums for office, apartment and retail were above their historical averages. For office, the rate was within 40 bps, apartment within 30 bps and retail within 20 bps. Industrial risk premiums had the smallest margin, as the Q4 rate dropped to within 10 bps of the 10-year average. Hotel remained the lone standout, where premiums increased in Q4 — further distancing itself from its 10 year average to just north of 80 bps.
CRE Risk Premiums
Sources: RC Analytics, Department of the Treasury, Ten-X Research
CRE Cap Rates Declined in Q4
Aside from hotel sector, cap rates declined across all CRE sectors. Hotels is a shade under its 10-year average, while all sectors' cap rates remained significantly below their 10-year averages. Meanwhile, apartment, retail and industrial cap rates were at their lowest marks since 2001 (the earliest data available per RCA). Retail cap rates witnessed the biggest quarterly decline: 20 bps from Q4 down to 6.4 percent. Office, retail and industrial saw cap rates drop 10 bps each, while hotel remained the sole holdout, with cap rates increasing to 8.5 percent.
CRE Cap Rates
Ten-X (formerly Auction.com) is the nation's leading online real estate marketplace, having sold 200,000+ residential and commercial properties totaling more than $37 billion since 2007. Leveraging desktop and mobile technology, Ten-X allows people to safely and easily complete real estate transactions entirely online. Ten-X is headquartered in Irvine and Silicon Valley, Calif., and has offices in key markets nationwide. Investors in the company include Google Capital and Stone Point Capital. For more information, visit Ten-X.com.