‘Sharp Decline’ in Commercial Real Estate Transaction Activity: Ten-X

Investment activity decreased during the first quarter after two quarters of growth, reported Ten-X, Irvine, Calif.

Overall transaction volume fell 32 percent from the prior quarter to $90.9 billion, an 18 percent drop from fourth-quarter 2016 and 43 percent lower than its late 2015 peak. Ten-X noted the decline was not unexpected because investors have pulled back “sharply” since the November election due to higher financing rates and uncertainty surrounding future exit cap rates. As a result, total deal volume fell below $100 billion for the first time since early 2014.

“Uncertainty is always among the greatest threats to continued economic expansion and investment and commercial real estate is currently facing a multitude of questions that threaten to shift segment and market fundamentals,” said Ten-X Chief Economist Peter Muoio.

Muoio noted in addition to a new administration that has yet to signal a clear direction on various issues affecting the economy and commercial real estate, shifts in Fed policy and political upheaval around the world are hampering deal flow. “Furthermore, investors are exercising caution specifically because of the length of this bull market, as many wonder how long this unusually prolonged recovery can last,” he said.

The commercial real estate market contraction comes despite a strong labor market that reached a cycle-low 4.4 percent unemployment rate. “Wage growth is healthy, though the pace of average hourly earnings growth has not accelerated recently even though an increase in the average number of weekly hours worked has helped increase worker pay,” Muoio said. “Those positives, however, have not been enough to overcome mounting political, monetary and technological questions facing real estate and the economy at large.”

Deal volume declined in all five commercial real estate sectors during the quarter, Ten-X reported. The apartment sector–which has long paced the market in terms of transaction activity–posted a steep decline of 600 basis points from the prior quarter, though the sector continues to make up an outsized portion of deals. Retail and industrial each saw their respective shares of total volume increase. The office and hotel sectors had modest declines in volume, falling 130 basis points and 50 basis points respectively.

Despite the steep decline during the quarter, total five-sector volume remained 16 percent above its historic 10-year average–an indication that capital markets remain generally healthy, Ten-X said. Industrial and retail performed best, notching volumes 30.2 percent and 26.7 percent higher than their averages, respectively. Apartment and office surpassed their averages by 17.3 percent and 14.6 percent. Hotel was the only segment to see its volumes underperform relative to the historical average, posting a first-quarter total 21.3 percent lower than its 10-year average.