Ten-X: CRE Volume Bounces Back in 2Q

Commercial real estate investment activity expanded in the second quarter after a “sharp” contraction early in the year, reported Ten-X, Irvine, Calif.

“After hitting a post-election ‘pause button,’ the industry seems to have digested and even shrugged off a flurry of policy announcements, concluding that many of the previously touted reforms will not be implemented,” said Ten-X Chief Economist Peter Muoio. “Instead, commercial real estate investors are assuming the U.S. economy will continue to slowly and steadily expand in coming quarters.”

Muoio said the market accepted the expectation that the Fed will continue to raise interest rates “without [the expectation] significantly upsetting the apple cart.”

Overall transaction volume jumped 15.6 percent from the first quarter to $105 billion, Real Capital Analytics, New York, reported. All sectors increased except for retail. The multifamily, office and industrial sectors each outperformed their 10-year total dollar volume averages during the second quarter. Retail accounted for just 13 percent of total deal volume and experienced its third consecutive quarter of contraction.

Muoio said commercial real estate benefited from a “trifecta” of factors during the quarter: a decrease in policy uncertainty, the stabilization of interest rates and labor market resilience. “However, policy risk has not disappeared completely, given that a single political party controls both the legislative and executive branches of government,” he noted.

Risk premiums–the extra yield required for investors to invest in a certain sector–rose across four out of the five major sectors during the second quarter; industrial real estate was the only sector to see declining risk premiums. Reis, New York, recently noted that vacancies in the industrial sector have now fallen below their pre-recession levels.

Industrial sector risk premiums fell 20 basis points during the second quarter and 65 basis points over the last year, Ten-X said. The hotel sector saw the sharpest risk premium spike of any sector, gaining 50 basis points to reach a new record 6.8 percent. That “elevated” level reflects the hotel sector’s current secular and cyclical challenges, Muoio said. Office and apartment risk premiums, both down from a year ago, edged up 20 basis points from the first quarter.

The retail sector, facing the dual threat of e-commerce and a cyclical downturn, saw its risk premiums shoot past their 10-year average, jumping 40 basis points from the previous quarter.