Auction.com: CRE Activity Slows
Commercial real estate market activity shows signs of slowing and stabilizing after several years of run-up and appreciation, reported Auction.com, Irvine, Calif.
Total transaction volume across the five major CRE sectors dipped 6.5 percent quarter-over-quarter, sitting just 2.6 percent higher than one year ago, down from 24 percent higher in the second quarter. But the overall capital markets climate remains bullish–cap rates continued to tighten and prices across all sectors maintained their ascent, Auction.com said.
“A drop in sales volume back in the second quarter signaled an unexpected shift in the CRE market after a very strong first quarter, and now we’re seeing actual proof of a slowdown,” said Auction.com Chief Economist Peter Muoio. “While all of the major sectors are still performing better than a year ago, CRE as a whole is feeling the pinch from recent shifts in the U.S. economy.”
Muoio said CRE pricing remains on the uptick, led by a “promising” hotel sector, “even though that sector’s price growth decelerated over the past quarter and could cool in the immediate future.”
Office and apartment transaction volume increased in the third quarter as a share of the five-sector total compared to the second quarter. While apartment deal volume climbed and pushed the sector’s quarterly share 440 basis points higher than its 10-year average, office volume slightly trailed its 10-year average. Retail and industrial shares of volume held close to historical trends, though the hotel sector saw a “pronounced pullback” in activity, Auction.com reported. That sector’s share of total five sector deal volume shrank from at least 11 percent in each of the last two quarters to just 7.1 percent in the third quarter.
“Both CRE transaction volume and pricing have showed signs of softening over the past few months,” said Auction.com Executive Vice President Rick Sharga. “It’s likely that what we’re seeing is the result of reduced capital spending due to some weakness in the U.S. economy, coupled with a highly volatile economic climate in China and ongoing financial issues in Europe.”
Auction.com calculated that CRE risk premiums increased in the third quarter across every sector except for multifamily, where the premium declined. The other component of cap rates, the 10-year U.S. Treasury rate, dropped from 2.36 percent in Q2 to 2.17 percent in Q3, reversing much of a sudden jump seen in the second quarter.
The apartment sector’s premium remained the lowest of the five major sectors at 3.6 percent. “This potentially leaves apartment cap rates with the highest exposure to rising interest rates,” Auction.com said. Despite the apartment sector’s quarterly decline, the risk premiums in all sectors remained higher than one year ago.
