CRE Activity Reaches New High: Ten-X
Commercial real estate capital markets activity–especially transaction volume–reached a new cyclical high in the fourth quarter, reported Tex-X, Irvine, Calif.
Total deal volume for the five major CRE sectors reached $150.3 billion, up 20 percent from a year ago, said Ten-X Chief Economist Peter Muoio. Fourth quarter sales figures represent the highest quarterly total since the recession hit and a sign of recovery after some sluggishness in mid-2015.
“While a slowdown in CRE was evident after we saw drops in sales volume across the second and third quarter of 2015, a fourth quarter spike in deals lends evidence to increasing confidence in the U.S. real estate market,” Muoio said. “All five CRE sectors saw quarterly increases in deal volume, thanks to the strengthening U.S. dollar and the typical fourth quarter rush among investors to complete deals by the end of the year.”
Though all five sectors saw quarterly increases in fourth quarter deal volume, Muoio noted some variances. Industrial deal volume grew 65 percent and apartment volume by 47 percent between the third and fourth quarters. The office and retail sectors improved from the third quarter but dropped compared to a year ago.
On pricing, Muoio said the apartment, industrial, hotel and office sectors each hit record pricing peaks in the fourth quarter, but retail prices remained 1.6 percent below their pre-recession peak. Prices were higher than their prior cyclical peaks for apartment (35 percent), industrial (3 percent) and office (20 percent). The office sector enjoyed pricing growth despite a split between central business district asset growth and suburban asset growth: CBD office prices exceed pre-recession peak pricing while the suburban office subset remained nearly 10 percent below its prior cyclical peak.
Ten-X said risk premiums decreased between the third and fourth quarters across all five CRE sectors except for hotels, where the premium increased slightly to 6.3 percent, the highest of the five sectors. This could leave hotel cap rates with the lowest exposure to rising interest rates. Due to the decline in risk premiums across the four remaining sectors, risk premiums as a whole were lower than their year-ago levels in all sectors except hotel, which saw a 46 basis point bump from a year ago.
Risk premiums for office, apartment and retail remained slightly above their historical averages. For office, the rate was within 40 basis points, apartment within 30 basis point and retail within 20 basis points. Industrial risk premiums had the smallest margin, as the fourth quarter rate dropped to within 10 bps of the 10-year average. Hotels remained the lone standout that saw increasing premiums in the quarter, further distancing itself from its 10 year average to just north of 80 basis points.
Except for the hotel sector, cap rates declined across all CRE sectors, Ten-X reported. Hotel cap rates are now a shade under their 10-year average, while all other sectors’ cap rates remained significantly below their 10-year averages. Meanwhile, apartment, retail and industrial cap rates reached their lowest marks in more than 10 years. Retail cap rates witnessed the biggest quarterly decline, falling 20 basis points to 6.4 percent. Office, retail and industrial saw cap rates dropped 10 basis points each, while hotels again went against the tide and saw cap rates increase to 8.5 percent.
