Auction.com, LLC, an online real estate marketplace, released its Q3 2015 Commercial Real Estate (CRE) Market Monitor, which reveals that CRE market activity is continuing to show signs of slowing and stabilizing after several years of run-up and appreciation.
Total transaction volume across the five major CRE sectors dipped 6.5 percent on a quarter-over-quarter basis, sitting just 2.6 percent higher than a year ago — down from 24 percent higher in Q2. The slowdown in deal volume occurred amid the patch of U.S. economic softness in late summer, though the overall capital markets climate remains bullish. Cap rates continued to tighten and prices across all sectors maintained their ascent.
“A drop in sales volume back in Q2 signaled an unexpected shift in the CRE market after a very strong first quarter, and now we’re seeing actual proof of a slowdown,” Auction.com Chief Economist Peter Muoio said. “While all of the major sectors are still performing better than a year ago, CRE as a whole is feeling the pinch from recent shifts in the U.S. economy. Paced by a promising hotel sector, however, CRE pricing still remains on the uptick, even though that sector’s price growth has decelerated over the past quarter and could cool in the immediate future.”
Office and apartment transaction volume increased in Q3 as a share of the five-sector total relative to the second quarter. Although apartment deal volume climbed and pushed the sector’s quarterly share 4.4 percent higher than its 10-year average, office volume was only slightly trailing its 10-year average. Retail and industrial shares of volume did not significantly deviate from historical trends, though the hotel sector saw a pronounced pullback in activity. That sector’s share of total five-sector deal volume shrank from at least 11 percent in each of the last two quarters to 7.1 percent in Q3.
Outside of the hotel sector, the other four major sectors continued seeing year-over-year price growth stabilization between 10 percent and 20 percent. Hotel pricing skyrocketed 30.4 percent from a year ago. Hotel sector prices contracted on a year-over-year basis in Q2 and Q3 of 2014, but bounced back moderately in Q4 that year before exploding in the first three quarters of 2015. Office (18.6 percent), retail (13.7 percent), apartment (13.2 percent) and industrial (11.2 percent) all are up from a year prior.
Hotel pricing hit an all-time peak, with retail the only remaining sector yet to make its way back to pre-recession peak pricing. Retail prices in Q3 still were 4.4 percent short of their pre-downturn peak, while apartment (33.5 percent), office (17.9 percent) and industrial (3.1 percent) pricing were higher than their prior all-time peaks.
Year-over-year hotel price growth decelerated slightly in Q3 from Q2, but still remained strong as operating conditions, including room demand, average daily room rates, RevPAR and occupancy rates, continued to hover at or near their all-time peaks, and the supply pipeline has been ramping up considerably.
“Both CRE transaction volume and pricing have showed signs of softening over the past few months,” Auction.com Executive Vice President Rick Sharga said. “It’s likely that what we’re seeing is the result of reduced capital spending due to some weakness in the U.S. economy, coupled with a highly volatile economic climate in China and ongoing financial issues in Europe.”