RCA Insights

Declining Volumes, Not Doomsday

By on June 15th, 2017

There has been a growing disconnect between U.S. deal volume and pricing in recent months. The National All-Property Moody’s/RCA CPPI1 posted a 7.0% YOY gain in April though deal volume was down 21% YOY in that month. Preliminary figures for May suggest another month of double-digit declines in deal volume.

Typically, volume and price trends are well-coordinated, particularly when buyers and sellers have a conviction in the outlook of the market and the only disagreement among participants is the magnitude. Currently, there is no strong consensus among property investors.

On one side, you can point to current prices at peak levels and exit values that may be jeopardized by higher interest rates. At the same time, the wide spread between cap rates and mortgage rates, modest levels of leverage and modest levels of new construction provide some comfort that the market is not overheated.


1706 preview main for WP

At times like these when the outlook is uncertain, buyers move to the sidelines or become more selective; sellers opt to hold their properties or stick to their pricing expectations. Volume, not price, becomes the adjustment mechanism, which is exactly what we are seeing in the market today.

It is most apparent in the apartment sector where volumes are off 30% through May, yet property prices were up 7.5% YOY, though the rate of appreciation has slowed considerably. In the office sector, volumes are not down as severely yet property prices also continue to rise – up 10.5% YOY in the latest Moody’s/RCA CPPI.

In the retail sector, where the outlook is more widely believed negative, volume and prices are moving in the same direction. The Moody’s/RCA CPPI for retail posted a 1.5% YOY decline in prices in April and is a leader in the volume declines for May. The industrial sector is a rising star with growing interest from institutional investors and it posted an 8.9% YOY growth in prices in April and preliminary figures for May suggest positive YOY growth in deal volume.

Next week Real Capital Analytics releases the new edition of US Capital Trends, with analysis of deal volume and price trends in May.

1Starting in July the Moody’s/RCA CPPI will be known as the RCA CPPITM. Click here to sign up for these reports from RCA.

Jim Costello

Jim Costello

Senior Vice President

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.