By Jim Costello on January 17th, 2019
The U.S. commercial property market hit near-record levels of deal activity in 2018, with preliminary Real Capital Analytics data indicating that investment volume was higher than any recent year but 2015. This said, there was a pronounced slowdown into the fourth quarter.
There are mixed signals in the recent trends for commercial property sales. In some respects, there is data out there for whatever story one wants to tell. One could pick and choose different indicators to tell a great story on performance, or one of caution and concern. The truth is somewhere in between such views.
Normally, deal activity in any fourth quarter period will be greater than that for the preceding third quarter because of seasonal effects. Aside from the period around the Global Financial Crisis and in 2005, U.S. deal volume has never been lower in a fourth quarter than in a third quarter. Preliminary RCA data shows that Q4’18 volume came in almost $2 billion lower than the previous quarter. At the same time, however, the level of activity in the final quarter of 2018 increased at a double-digit pace from a year prior.
One of the strongest parts of the market in 2018 was entity-level transactions. The high-water mark for entity-level deal activity in this cycle had been 2015, when such M&A type deals came in at $63.5 billion for the year. Preliminary figures suggest that these deals were nearly $5 billion higher in 2018 and represented roughly 12% of all volume for the year.
However, the sale of individual assets was challenged in Q4’18, particularly into December. Preliminary figures suggest that fourth quarter deal volume for individual asset sales was flat relative to Q4’17. Flat is not bad when considering that deal volume is at elevated levels above $100 billion per quarter for such transactions. This said, activity fell off into December relative to a year earlier.
The trends for prices were relatively unchanged in Q4’18 despite the lower-than-normal pace of deal activity. Cap rates were mostly flat even with the volatility in the financial markets. This volatility may well explain the changes in deal volume.
The 10yr UST climbed sharply early in Q4’18. This benchmark rate had been at a fairly stable average close to 2.9% for most of the year, then spiked to an average 3.2% in October. This 30 bps increase may not sound like much, but it came so quickly it introduced a sense of caution in the market. That caution may well have driven the weakness in the year-end given that deals closing in December are typically already underway by October.
In our 2018 Year in Review edition of US Capital Trends to be published next week, we will provide in-depth analysis of all property types and track changes in investor activity by market and property sector. Trends in the RCA CPPI will be examined and will provide a gauge of how prices moved late in 2018 in response to the financial market turmoil.