Ten-X: CRE Activity Contracts After Q4 Surge

Commercial real estate transaction volume decreased significantly in the first quarter after reaching a cyclical peak in late 2015, reported Ten-X, Irvine, Calif.

Total deal volume for the five major CRE sectors fell to $108 billion, representing an 18.5 percent decline from one year prior. But despite the cyclical valley in deal flow, real estate fundamentals continue to improve, said Ten-X Research Chief Economist Peter Muoio.

“A first quarter slowdown in transactional volume was predictable, as investors traditionally push to get deals on the books by the end of the fourth quarter,” Muoio said. He noted that while these figures show a near-33-percent drop-off from the previous quarter, “it’s important to note that, adjusted for seasonality, current deal flow has recovered to within 8.3 percent of pre-recession highs.”

Muoio said that although deal flow across the office, industrial, retail, multifamily and hotel sectors fell 32.7 percent from fourth-quarter peaks, total transactional volume still broke the $100 billion threshold for the seventh consecutive quarter.

Overall, each sector except for hotels is outperforming its 10-year quarterly average for overall transactional volume. Retail and multifamily now outpace their 10-year averages by 33.2 percent and 89 percent, respectively.

Despite declining in two of the past four months, overall property pricing grew 5.4 percent in April compared to one year prior, Ten-X said. Retail and multifamily led the way with yearly gains of 9.5 percent and 11.3 percent respectively. Overall property valuations are up 5.8 percent year-over-year.

As the 10-year U.S. Treasury rate–considered a “risk-free” investment–dropped to 1.89 percent from 2.24 percent in the prior quarter, risk premiums increased across all five CRE sectors in the first quarter. The industrial segment increased 120 basis points to 5.6 percent. The hotel sector continued to post the highest risk premiums of any sector, increasing to 6.6 percent.

“In all cases, risk premiums are now higher than they were one year ago, save the apartment sector, which saw only a modest increase in the first quarter,” Ten-X said. The report predicted that Treasury rates will likely remain flat in the near term, due to concerns about job growth, oil prices and global volatility, which it said should relieve upward pressure on cap rates.

Despite the U.S. Treasury rate drop, cap rates saw only modest declines in the office, multifamily and hotel sectors, Ten-X said. Meanwhile, industrial cap rates rose from their cyclical low to 7.3 percent, a 70 basis point increase, while retail rates increased 10 basis points. Still, all sectors hover below their 10-year averages except for hotels, which matched their 8.5 percent fourth-quarter average. The apartment sector saw the greatest separation with cap rates 70 basis points lower than its 10-year average, the largest gap in the post-recession recovery.

“Although we’re seeing slight seasonal fluctuations in segment-specific valuation attributes, the longer-term trends we’re seeing in CRE continue to point toward a recovery to pre-recession levels,” Muoio said.