‘Stable’ 1Q Conceals Shifting Market

The first quarter saw stable CRE operating fundamentals, cap rates and transaction volume, but shifts in market participants that drove activity, reported PwC, New York.

“Our U.S. real estate deals environment continues to remain active with substantial capital flows and new market entrants from adjacent industries and geographies driving activity,” said PwC U.S. Real Estate Deals Leader Tim Bodner.

Real estate is now on every board’s agenda, the company’s Real Estate Deals Insights report said. “While real estate within a corporate environment was historically viewed as a cost center, it is now being viewed as a critical part of a company’s strategic agenda,” the report said. “We expect that we will continue to see companies reimagining the possible and adjusting their real estate footprint to fit accordingly as they continue adjusting to a new market reality surrounding the workforce of the future.”

PwC noted transaction activity across most property types slipped in early 2018 except for the industrial sector, which remains an industry favorite. Year-to-date industrial sector transaction volume increased more than 40 percent year-over-year. But across all sectors year-to-date transaction volume as of February fell to $61.4 billion, the lowest level in five years.

“Anticipation of increasing interest rates has further fueled a disconnect between the bid and ask of buyers and sellers, extending the downward trend of transaction volume,” the report said, noting particular evidence for this in major metros where 2017 volume fell more than 15 percent compared to 2016 while volume in non-major metros increased slightly.

“Dry powder” slated for commercial real estate investment continues to rise, with $266 billion currently available for investment as of March–up 7 percent from year-end 2017. “With the abundance of available capital chasing a limited supply of institutional-grade real estate, on top of the greater levels of competition for the assets that are currently available, valuations remain the key concern for real estate fund managers,” the report said.

Overall, market participants are “reasonably satisfied” with how commercial real estate is performing. But some reported seeing slowing rent growth and value growth in the near term. “Still, pricing and cap rates remain relatively stable,” PwC said.