RCA Insights

Finding the Next Meal

By on June 5th, 2017

In the hypercompetitive world of commercial real estate investment, if you are not buying or selling properties then you do not earn acquisition fees, commissions or promotes downstream. If you are not active then, like our hunter-gatherer forebears looking for that next mastodon, you do not eat. With that framework in mind, those participants focused on the priciest deals are facing the biggest challenges in the current market.

U.S. quarterly deal volume has not matched the height of activity seen in Q4’15. In fact, the $167b in investment in Q4’15 was the strongest quarter ever in the U.S. for the sale of commercial properties. Looking at trends on a 4-quarter trailing basis to exclude seasonal factors, deal volume in Q1’17 was 12% lower than at this peak.

Transactions of all sorts did not pull back equally, however. The sharpest declines in activity have been for those deals priced $500m and greater. The Q1’17 deal volume for these priciest deals was down 44% from peak values. The deals priced from $100m to $500m had the next sharpest decline, down 10% from peak values. All deals in the smaller ranges have activity that is essentially unchanged.

1706 Costello next meal main v3

Still, conditions are still far more favorable for the investors active in the $500m-and-greater space in the current market than in the aftermath of the Global Financial Crisis. Activity for the priciest deals fell from a 4-quarter trailing peak of $231b in Q4’07 to only $1.7b by Q3’09. So, in the current market, it is not like the past where the big game disappeared, there are simply fewer mastodons out and about.

Our early hunter-gatherer forebears would have some lean times in between each mastodon they would kill. Some of our forbearers settled in for the slow, steady option of farming. True, the meals would have been more sparse than Fred Flintstone’s brontosaurus ribs, but a steady predictable source of food was a boon.

Likewise, those market participants active in the space for deals priced at $100m and less are not going to face the same challenges as those focused on the priciest deals. Commissions, fees and promotes downstream may not be as large but to know there is something there each month can be reassuring.

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.