Avison Young: CRE Slows But ‘Robust’ Deal Flow Remains
U.S. commercial real estate in first-half 2017 lagged slightly compared to one year ago, reported Avison Young, Toronto.
More than half (21) of the 40 markets the firm surveyed reporting reduced investment activity. But deal flow remained “robust” in the first half, Avison Young noted. Though investment volume dropped year-over-year, foreign investors continued to pursue U.S. assets “aggressively,” the report said.
Canadian investors re-took the lead, displacing China as the largest source of cross-border investment into U.S. real estate. “Despite this overall pullback by Chinese investors, investment from other Asian countries, including Japan, Singapore and Hong Kong increased,” the report said.
Avison Young U.S. Operations President Earl Webb called the 12 percent year-over-year transaction volume drop “significant.” He said it illustrates a “disconnect” between seller expectations and buyer underwriting occurring in many U.S. markets. “This disconnect is somewhat in conflict with the broad improvement in market fundamentals that the U.S. continues to register,” he said. “Nevertheless, the competition for institutional-quality assets continues to push values higher.”
John Kevill, Avison Young Principal and Managing Director, noted the biggest buyer-seller disconnect occurs in properties with near-term asset-level risk. “In many instances, a view that we are late in the cycle is limiting buyers’ ability to underwrite steady growth, thus negatively impacting price,” he said. “As a result, many deals are not getting done, contributing to the decrease in sales volume.”
While cap rates for office, industrial and multifamily properties dipped slightly across the U.S., the overall average cap rate across all markets and property types remained unchanged compared to a year ago due to rising retail cap rates, the report said. Large markets including New York, San Francisco and Los Angeles continue to record cap-rate compression, Avison Young said. “Other attractive metro markets, such as Washington, D.C., San Diego, Denver and Miami registered an uptick in cap rates generated by a limited supply of trophy central business district assets, which have historically exhibited the lowest cap rates.”
The most significant investment sales volume increase occurred in San Francisco, which registered a 73 percent hike compared with the same time in 2016, the report said. Orlando, Boston and Houston also posted impressive growth rates of 61 percent, 52 percent and 40 percent, respectively.
“Investors will continue to place a premium on transit-served locations where a live-work-play environment exists or can be developed,” Kevill said. “These locations tend to attract demand generators in the form of key office tenants and superior amenities, which lead to rental-growth premiums and strong asset performance.”
