Ten-X: CRE Transaction Activity Increased for First Time in 2016 in Q3

Capital markets saw a “modest” increase in the third quarter after two consecutive quarters of decline, reported Ten-X, Irvine, Calif. 

Overall transaction volume increased 2.1 percent from the second quarter to $111 billion, driven largely by increases in the hotel and apartment sectors, Ten-X said. This means volume exceeded $100 billion during each of the last nine quarters. 

Ten-X Research Chief Economist Peter Muoio said the market remains relatively healthy despite both global and domestic economic uncertainty.”While widespread volatility in the wake of Brexit and the uncertainty surrounding the U.S. presidential election have hampered many major markets across the world, the domestic commercial real estate market has remained the picture of resilience,” he said. “Property prices continue their steady climb while interest rates appear poised to remain historically low, making the market a relatively safe haven for investors looking for shelter from swirling global headwinds.”

Apart from a “flood” of deals sent that sent volume soaring in late 2015, the overall market appears to have plateaued since 2014, evidenced by a 0.3 percent year-over-year decline in deals during the third quarter, Ten-X said. But it noted that several factors including surging wages and the market’s continued ability to attract foreign investment help it remain promising for investors.

The deal volume increase from the second quarter to the third marks the first uptick in 2016, Ten-X said. Each of the five major market sectors outperformed their 10-year total dollar volume averages during the quarter. Apartment volume led the way by outperforming its average by more than 70 percent, office, retail and industrial each topped their 10-year averages by 30 percent or more and the hotel sector exceeded its 10-year average by 5.6 percent during the quarter.

As the 10-year Treasury rate remained relatively flat at 1.63 percent, risk premiums across the industry mostly reverted to their first-quarter rates, Ten-X noted. One exception: the hotel sector, where cap rates rose 10 basis points from the second quarter in reaction to both cyclical and fundamental challenges that face the hospitality industry as a whole. This represents the fifth consecutive quarter in which hotels saw risk-premium upticks.

Third-quarter cap rate trends echoed risk premium trends, with the hotel sector emerging as an outlier, Ten-X noted. Hotel cap rate rose by 5 basis points to an 8.5 percent 10-year average. But cap rates trail their long-term averages “significantly” in all other sectors, the firm noted. “The industrial and apartment sectors are particularly striking,” Ten-X said, sitting 100 basis points and 90 basis points below their averages, respectively. The office and retail sectors trail their averages by 70 basis points and 60 basis points, respectively.