RCA Insights

A Fantastic Decade for US Commercial Real Estate

By on January 16th, 2020

While 2019 sputtered to a close with tepid deal volume, the last decade overall has been fantastic for the U.S. commercial real estate market. The headline national RCA CPPI climbed a cumulative 103% from the close of the previous decade and investor interest in the sector continues at a high level. However, even as Real Capital Analytics clients were doing well over the past 10 years, there were fears that it was too good to last.

Back at the start of the decade investors were growing concerned that the 10yr US Treasury would rise and bring cap rates back up from what were starting to look like low levels. In fact, cap rates for apartment, office, industrial and retail properties had so much more room to fall at that time – anywhere from 120 to 210 basis points depending on the sector.

The severity of the downturn following the housing bust clearly weighed on the minds of investors throughout the last decade, as evidenced by past editions of US Capital Trends. An element of caution entered underwriting with fewer highly leveraged deals and more comfortable cushions on key metrics. Indeed, the spread between cap rates and the 10yr Treasury ranged from 700 bps to 390 bps across the five main property sectors at the close of 2019.

Price growth nationally over the past decade pales in comparison to some of the fastest growing U.S. markets. The All-Property RCA CPPI in San Francisco climbed a cumulative 222% over the 10 years and in Manhattan prices climbed 182%. This price growth is on par with the increase in the Nasdaq Composite Index over the same time frame.

However, it has not been a decade of uninterrupted growth. Prices peaked in Manhattan in 2017 as the market got a bit ahead of itself following an influx of new capital from China. Even as that flow of capital abated, the market did not collapse as during the Global Financial Crisis. Instead, prices corrected to take away some of the froth before resuming growth. Over 2019 prices grew 4.1% for Manhattan, based on preliminary RCA CPPI data for December.

Still, there are challenges on the horizon. Just because we had a fantastic decade does not guarantee we will see another. Underwriting has been cautious, but as more young professionals come into the industry without having experienced the trauma of the GFC, will they repeat the same mistakes? The specter of rent control is taking some wind out of investor demand in the apartment sector. Will regulatory voices grow and further limit the apartment market? How will these and other forces impact commercial property trends through to 2030? Stay with us and see.

On January 22 Real Capital Analytics will release the new edition of US Capital Trends, reviewing deal volume and pricing trends for 2019 and ranking the top buyers and sellers, brokers, markets and deals of the year.

Also on RCA Insights:

Top Global Investors: Changing Appetites in 2019

Chart: US Monthly Volume and Pricing Trends by Sector

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.