IRVINE AND SILICON VALLEY, CALIF. – September 7, 2016 – Ten-X, the nation’s leading online real estate transaction marketplace, today released its latest Commercial Real Estate Capital Trends report, which reveals that capital markets cooled for the second consecutive quarter in Q2 2016 as overall transaction volume dropped 12.7 percent from its year-ago level to $101.2 billion. Despite the continued fall in deal volume from its late-2015 peak, the new research from Ten-X points to several fundamental economic indicators that continue to reflect a relatively strong marketplace, including the commercial real estate market’s position as an increasingly safe investment for foreign entities.
“While the downward trend in deal volume may appear to be cause for concern, our research shows that the U.S. Commercial Real Estate market continues to provide attractive investment opportunities, particularly in the face of widespread uncertainty following Brexit and other financial and political turbulence abroad,” said Ten-X Research Chief Economist Peter Muoio. “Meanwhile, property prices have rebounded from their winter lull, and are up over eight percent across all sectors from this time last year.”
CRE Transaction Volume Declines in Q2
The resilience in the market comes amid a tumultuous period in many major foreign economies, which has spurred Chinese investment in many gateway U.S. markets, according to Ten-X. And, in light of the continued fallout after Brexit, the relative strength of the U.S. economy makes the country’s commercial real estate assets a safe and attractive prospect for foreign capital.
Overall confidence in the market remains relatively strong, as Q2 marked the eighth consecutive quarter in which deal volume topped the $100 billion threshold, and the 12-month rolling total remains just 11 percent behind the pre-recession peak. Four of the five market sectors outperformed their 10-year averages by more than 20 percent, and continued investor demand in multifamily properties led the apartment sector to beat its average by a healthy 55 percent. The lone exception was the hotel sector, in which total deal volume plummeted by more than 50 percent, compared with the same period in 2015.
Transactional Volume by Sector
The multifamily sector was responsible for 32.3 percent of transactional volume in Q2, easily outpacing its 10-year average for overall market share. The other four sectors lagged behind their respective averages.
High liquidity and continued yield chasing by investors drove property pricing out of a winter chill during Q2, as overall pricing rose 8.4 percent compared to the same period last year, research shows. After a slow start to the year, the Ten-X All Property Nowcast, which gauges national pricing through a combination of proprietary and third-party data, has now risen for five straight months, including a 1.1 percent boost in July that marks the largest increase of the year.
The Industrial Nowcast declined by 1.2 percent in July, according to Ten-X, making it the only sector to see a dip during an otherwise fruitful month. Despite the decline, however, the sector still boasts year-over-year growth of 11.7 percent – the highest of any of the five sectors.
The Office Nowcast has seen annual growth of 7.6 percent, while the apartment and retail sectors have risen 6.8 percent and 6.4 percent, respectively. The Ten-X Hotel Nowcast was flat in July amid a year-long slump that has seen a total decline 4 percent.
Spurred by a wave of urbanization and a widespread societal shift toward apartment living, prices in the sector have surpassed their previous highs by a whopping 46.7 percent. A strong second quarter also drove industrial and hotel above their prior peaks by 7.5 and 9.7 percent, respectively. Only the office sector failed to surpass its previous best, trailing it by 1.2 percent, while retail prices slipped past their peak, with modest 0.1 percent gain.
A Mixed Bag of Risk Premiums
After an across-the-board rise during Q1, risk premiums have dropped in a pair of sectors during the year’s second quarter, according to Ten-X. Hotel and industrial each saw a minor decrease - 10 and 15 bps, respectively. Retail and apartment sectors declined by 30, 20 and 10 bps, respectively, solidifying the hotel sector’s premium of 6.5 percent as by far the highest of all five sectors.
Due largely to the continued compression of Treasury rates, risk premiums continue their overall increase, and are now higher than they were one year ago in each of the five sectors. Ten-X Research predicts that rates are likely to level out in the near future, as employment growth increases and confidence in Europe begins to build again following the Brexit fallout.
Cap Rates Trending Downward
In Q2, cap rates retreated across four of the five asset classes, with retail and apartment reaching new cyclical lows of 6.4 perecent and 5.6 percent, respectively. After a spike in Q1, the industrial sector saw a 40 bps cap rate decline, while hotel’s figure fell 30 bps. Cap rates for all five asset classes have dipped below their respective 10-year averages, led by industrial, retail and apartment, each of which hang 70 bps lower than those figures.
“While capital trends show something of a mixed bag, our research paints a clear picture of the continued demand for U.S. properties, especially those asset types considered most stable, such as multifamily,” added Muoio. “Notably, even within the retail sector, NNN properties, which present the least amount of risk, are seeing significant deal volume from institutional investors, as commercial real estate remains a safe haven for capital amid global unrest.”
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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 244,000+ residential and commercial properties totaling more than $41 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 Google Capital and Stone Point Capital. For more information, visit Ten-X.com.