CRE Markets Healthy But Inconsistent in Second Quarter

Commercial real estate prices and deal volume remained “healthy” but without consistent growth patterns in the second quarter, said Ten-X Commercial, Irvine, Calif.

Ten-X Chief Economist Peter Muoio said CRE transaction volume totaled $111.4 billion in the second quarter, a 1.5 percent increase from the previous quarter and a 1.7 percent increase from a year ago. Following a two-year decline, retail sector deal volume increased during the quarter to $20.7 billion, its highest point since late 2014. Apartment and office deal volume remained virtually the same as the prior quarter. The hospitality and industrial sectors experienced a quarterly decrease, but both sectors showed year-over-year increases in deal volume.

“Overall CRE deal volume remains healthy, with overall deal flow up slightly amid variations across the different property segments,” Muoio said. “It appears that the bid-ask price gap between sellers and buyers has diminished, aiding the market as a whole, but investors continue to digest shifting fundamentals across the property segments, driving ups and downs quarter-to-quarter.”

Muoio said commercial property valuations grew “slightly” for the sixth consecutive month with a 0.1 percent rise in July. The office sector remained an outlier with a more substantial 1 percent pricing increase for the second sequential month, marking an overall 4.4 percent increase from the same period last year. “The office sector is the only sector to show prominent pricing gains in recent months,” he said, noting pricing gains in the West, Southwest and Southeast U.S. while pricing declined in the Northeast and Midwest.

While the apartment and industrial sectors saw smaller increases–up 0.1 percent and 0.2 percent respectively from the previous month–the retail and hotel sectors posted pricing declines.

“Current events and legislation fueled some investment activity,” Muoio said. “Recent back-and-forth tariffs with China may be a concern for those looking to invest in the industrial sector, causing an increase, while the peaks and valleys of investment within the hotel sector have a strong correlation with the country’s economic conditions, labor market and GDP.”

Muoio noted no clear direction for CRE pricing at this time, “mirroring the drift in deal volume.”

Cap rates remained steady during the quarter despite rising Treasury rates, which compressed spreads across sectors, Muoio said.

The Federal Reserve has been increasing rates since 2015, with the seventh and most recent increase occurring in June. But despite the Fed’s hikes, interest rates remain low and have yet to materially affect cap rates, just spreads, Muoio said. “Cap rate spreads are compressing with the spread between cap and interest rates across all sectors decreasing year-over-year,” he said. “The tighter cap rate spreads suggest that investors have more confidence in the commercial real estate market.”