RCA Insights

US Commercial Property Market Shows Signs of Thaw

By on April 19th, 2018

The slide in U.S. deal volume halted in Q1’18 after five consecutive quarters in which activity declined. Preliminary figures suggest that volume grew 1% from the same period a year earlier.

The trend for the first quarter is not uniform across property sectors. The apartment sector led the pack in terms of total deal volume for the quarter, though the industrial and hotel sectors grew at a faster pace. Activity declined for both the office and retail sectors.

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Deal volume was buoyed by the sale of individual assets. These deals represent the bedrock of the market in that investors underwrite the performance of individual assets based on local factors driving property income and not broader financing changes which can drive portfolio and entity-level deals. The level of activity for those financing-driven megadeals fell in the quarter.

One regional driver of this growth was sale activity in Manhattan. As the largest market in the U.S., the recent double-digit slide in deal volume has been dragging down activity nationally. While the total figures are not finalized, one telling signal in Manhattan was the increase in the number of large property sales. In Q1’17, there were only four properties priced at $250m or greater as buyers and sellers were at an impasse, and in Q1’18 there were 13 such properties traded.

While in Manhattan there may be a bit of a reengagement between buyers and sellers, nationally there is less incentive for these market participants to see eye to eye on pricing. With owners of existing assets less willing to sell, those assets that come to market are generally achieving better pricing. As a result a preliminary run of the RCA CPPI shows that prices grew at a faster pace in Q1’18.

On April 25 Real Capital Analytics will publish the Q1’18 issue of US Capital Trends. This edition reports on the latest pricing and deal activity across the property types.

Jim Costello

Jim Costello

Senior Vice President
jcostello@rcanalytics.com

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.