CRE’s Upward Trajectory in 3Q12
- Nov 07, 2012
By Rick Putnam, Colliers International, Managing Director, Western Region, Capital Markets Group
The U.S. commercial real estate markets have continued their improvement during the third quarter of 2012, albeit at a slower pace than earlier in the year; multi-family product was the exception. While total trade volume was basically flat on average, there was an almost 60 percent increase in multi-family activity during the third quarter compared to last year, though mostly due to the Archstone/Lehman entity purchase.
In the commercial space markets during the summer, the four “gray swans” of Euro-zone concerns, slower emerging market growth, Mid-east oil supply risks, and domestic political/fiscal policy uncertainty certainly tempered tenants’ urgencies to hire more people or purchase inventory, and therefore to extend or expand their leases as well. This slowdown in tenant activity dimmed some investors’ ability to stretch underwriting values, and some volume tapered off as a result. There were also fewer high-quality offerings on the market during the third quarter. On the bright side, however, there were more individual (smaller) transactions, more transactions in the secondary markets, and less measures of distress overall, such as new defaults and foreclosures. A strong underlying reason for these trends is the improvement in the availability of and terms of mortgage financing, particularly in the secondary and tertiary markets.
U.S. sales of office, retail, multi-family and industrial portfolios and single assets totaled $58 billlion in the third quarter, a slight increase from a year ago. In the office sector and according to Real Capital Analytics, suburban office transactions saw a 61 percent increase in volume, while CBD sales were down 28 percent. While overall sales of retail product declined by over 50 percent, the western U.S. experienced a 60 percent increase in shopping center transactions, likely due to a larger supply of – and financing for – offerings into recovering western markets. Excluding Archstone, sales of apartments were up just slightly, and at higher cap rates, perhaps reflecting investors’ search for better yields in secondary markets. In the industrial sector, overall volume was up, but spread amongst many more and smaller deals, as large portfolio trades were mostly absent. Even so, average cap rates declined as loan liquidity improved, and allowed for higher valuations in primary and secondary markets.
Fourth quarter volume typically moves up as institutional investors and lenders both seek to fulfill their investment objectives, however, there appears to be less offerings currently on the market than in past final year-ends, perhaps due in part to the uncertainty noted above. That may change. Anecdotal evidence over the past two months indicates that the space markets are improving once again, after the summer’s “uncertainty” pause. If that is the case, investors will be encouraged, the bid-ask gap will narrow, and we will see larger trading volumes in early 2013.