RCA Insights

Formerly High-Flying Sectors Weigh on US Deal Activity

By on October 20th, 2017

A look at the preliminary transaction activity data for Q3’17 suggests that deal volume at year-end will be lower than that seen last year. Indeed, it would take a miracle of a fourth quarter to even come close to 2016 deal activity.

Even if deal volume into Q4’17 were to come in close to the $166 billion pace set in Q4’15 – a record fourth quarter – total deal activity for 2017 would be slightly lower than that seen in 2016. Given the pace of sales activity so far in 2017, however, such a surge seems unlikely. Through Q3’17, preliminary figures suggest that activity is 8% lower than that seen last year.

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The property sectors and subtypes which led so much of the growth in 2015 and 2016 just are not pulling the market ahead the way they had in the past. Preliminary figures show, for instance, that CBD office activity fell 50% YOY in Q3’17. The pace of CBD office sales for the year so far is better – down only 25% from the first nine months of 2016 – but clearly this sector is weighing on deal volume rather than lifting it.

Apartment investment was another highflyer which supported activity in past years. The story for Q3’17 is more encouraging here, with preliminary figures suggesting 4% YOY growth, but year-to-date deal volume is down 9% YOY.

Only the industrial and suburban office sectors have posted growing deal volume for both Q3’17 and for the year so far. While these sectors are ticking up, neither is large enough nor growing fast enough to offset the declines in the CBD office or apartment sectors.

While overall volume trends are down, it is not as if the market is collapsing. A preliminary look at the RCA CPPI to be published next week suggests that prices are at record highs in many cases. Investors are still interested in the yield opportunities in commercial real estate but underwriting new acquisitions is a more challenging process today.

With difficulty in underwriting, deal volume is lower but it is still healthy. It would take an awfully bad fourth quarter for 2017 deal volume to come in lower than the pace set in 2014.

Next week Real Capital Analytics will publish the new edition of US Capital Trends. In this edition we explore Q3’17 deal activity and pricing trends, with an analysis of the RCA CPPI. 

The RCA CPPI report will be released publicly October 26. To learn more about these price indices and to sign up for reports visit rcanalytics.com

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.