IRVINE, CALIF. — Commercial real estate markets are starting to show signs of stabilization following years of run-up and appreciation, according to Auction.com’s second-quarter 2015 commercial real estate market monitor report.
While CRE deal volume increased in the first quarter, volume declined 14.6 percent in the second quarter to $112.4 billion, but remains 24 percent higher than a year ago. The second quarter dip marked the first time since 2008 that total deal volume dropped on a quarter-over-quarter basis.
“It’s unclear whether the second-quarter drop in sales volume is the beginning of a slowdown in the CRE market, or simply an adjustment from an unusually strong first quarter,” says Rick Sharga, Auction.com’s executive vice president. “What’s clear is that all of the major CRE sectors continue to perform far better than they did a year ago, and may be strong enough to withstand a potential decline in international investment activity due to the economic issues in China and Europe.”
Europe continues to struggle with high unemployment and low growth, leading the European Central Bank to start its own quantitative easing program to spur lending and growth. This has depressed European interest rates when compared to U.S. rates, which have risen throughout the year from 1.8 percent on the 10-year yield in January to 2.2 percent now.
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In the U.S., stabilization appears to be underway, as evidenced by the second-quarter decline in deal volume. Office sector deal volume declined 3.7 percent on the quarter but remained 24.1 percent higher than a year ago, while industrial volume was down 18 percent on the quarter but up 39.8 percent year-over-year. Retail volume dipped 28.1 percent from the first quarter but is up 21.9 percent from a year ago and apartment deal volume fell 11.4 percent on the quarter but grew 12.8 percent year-over-year.
Hotel and retail sector pricing continue to work their way back toward pre-recession peaks, in contrast to the office, industrial and apartment sectors, which have already surpassed these levels. Industrial prices hit a new peak in the first quarter before edging back in the second, but they remain 0.8 percent higher than their pre-recession top.
The hotel sector being a notable exception, the other four major real estate sectors have seen year-over-year price growth stabilize between 10 and 20 percent. The pace of annual growth in retail pricing was slowing down from mid-2013 through mid-2014, but has recovered since then.
“High liquidity in the commercial real estate market, reinforced by persistent price growth and tight cap rates, paints a picture of a strong, competitive market that has investors exploring secondary and tertiary markets and asset classes in the pursuit of high yields,” says Peter Muoio, chief economist for Auction.com. “Of the five major sectors, the hotel sector is able to stand apart from the rest of the CRE markets’ recent dip thanks to a recovery in disposable household income, home price appreciation and cheaper energy costs.”
Hotel price growth is expected to cool down in the quarters to come but remain strong, since operating conditions, including room demand, average daily room rates, revenue per available room (RevPAR) and occupancy rates remain at or near all-time peaks.
Click here to read the full report.
— Haisten Willis