Commercial real estate market cools

Scotsman Guide - Victor Whitman - 04 April 2017

The once hard-charging market for commercial real estate continues to lose steam. 

Sales-transaction volume fell to $20.9 billion in February, down by 31 percent compared to the February 2016 level, according to Real Capital Analytics (RCA). January and December sales numbers also were down by high double digits compared to the respective months a year earlier.

More significantly, sales of single assets have declined steeply for the past three months. Single-asset sales, which represent the foundation of the overall market, were down 27 percent year over year in February, 23 percent in January and 17 percent in December, RCA said. The company tracks the sales of multifamily and commercial assets priced at or above $2.5 million.

Through 2016, sales volumes ran below the 2015 level. That drop, however, was due to fewer mega-deals involving the sales of portfolios with multiple properties. Last year, sales of single assets remained on par with the 2015 pace. The decline in single-asset sales over the past three months provides powerful evidence that the market is cooling off.

“There is clearly a general slowdown,” said George Ratiu, director of Quantitative and Commercial research for the National Association of Realtors (NAR). “It seems that investors are taking a very cautious and, if anything, measured approach to transactions in the top markets.”

Ratiu noted that inventories of properties for sale are tight across many markets.

“Tightness of inventory seems to be the number one issue across the board, when you look at New York, when you look at D.C.,” Ratiu told Scotsman Guide News. “A lot of properties are not coming online. As a result, there simply aren’t sales.”

Ratiu said the market for properties priced under $2.5 million also has inventory issues, but likely will not show a decline in sales volume. NAR will survey its members later this month to determine first-quarter activity. Most of its members are involved in sales under the $2.5 million threshold. 

“We clearly have a very different market,” Ratiu said. “My expectation is that the small-cap market will continue seeing improvement, in part because the yields are higher and small markets are lagging in the cycle by three years.”

 A standoff between buyers and sellers?

RCA analysts said the slowdown in sales could suggest that investors are balking at the prices and may expect property values to fall with an anticipated rise in interest rates.

“Still, while deal volume is falling, it is not as if the market is entering a collapse in activity like that seen in 2008 and 2009,” RCA reported in its U.S. Capital Trends report for February. The report further noted that prices remain firm, and large pool of lenders are competing to fund deals.

Despite the early-year slowdown in sales, the Mortgage Bankers Association (MBA) has projected a record year for commercial and multifamily originations.

According to MBA’s March forecast, origination volume will increase to $515 billion in 2017, up from $502 billion in 2016 and ahead of the record of $508 billion in 2007, the year of the last market peak. MBA expects origination volumes to climb an additional 2 percent in 2018.

“Property prices remain strong as do fundamentals,” said Jamie Woodwell, vice president of commercial real estate research for the MBA, during a March 20 webcast. “We think all of that could continue to support the strong levels of transactions and originations that we have had the last couple of years.”