Commercial Real Estate Deal Volume Slips
Commercial real estate transaction volume slipped 0.5 percent in the fourth quarter to $117.4 billion, said Real Capital Analytics, New York.
In addition, RCA Analytics Manager Elizabeth Szep noted total transaction activity dipped 3 percent in January compared to a year earlier. “The performance would have been worse but for portfolio and entity-level deals in the apartment and industrial sectors,” she said.
Ten-X, Irvine., Calif., said fourth-quarter investment activity plunged 13.2 percent compared to a year ago while the annual figured dropped a more modest 6.9 percent to $445.2 billion.
Ten-X Chief Economist Peter Muoio said late-2017 deal activity might have been slowed by uncertainty regarding December’s tax reform bill, which may have prompted investors to delay transaction closings until the new legislation took effect in 2018. But the legislation that eventually passed is likely to be beneficial to the real estate industry, he said: “The main question on everyone’s minds now is whether the delayed closings and optimism about the new tax regime will be enough to offset other headwinds and fuel deal volume growth in the first quarter of 2018 and beyond.”
Muoio called the increase in interest rates in recent months a “potential downdraft” on deal closings going forward as financing costs increase and cap rate expectations change.
Persistent concern about the age of the U.S. economic expansion–now in its 104th month–may also be hampering deal flow, Muoio said. The current cycle is the third-longest expansion in modern U.S. history.
Muoio said investor concern about the aging real estate cycle has created a “pricing gap” between sellers and many buyers, who have grown wary about purchasing property at tight cap rates so late in the game.
Risk premiums are thus far holding fast despite interest rate increases, Ten-X said. Following a bump up in December, 10-year U.S. Treasury rates rose 20 basis points quarter-over-quarter to 2.4 percent. This led to minor cap rate increases across most sectors while risk premiums largely held their ground.
Retail risk premiums held steady from the third quarter, while office and hotel premiums increased 10 basis points and 20 basis points, Ten-X said. Industrial and apartment risk premiums edged down 10 and 20 basis points, respectively. “[But] risk premiums are clearly going to be pressured by the sharp jump in Treasuries so far this year,” the report said.
