Commercial real estate transaction metrics are trending in a positive direction, with deal volume and pricing shifting upward as cap rate and risk premiums decline according to Auction.com’s Q2 2014 Commercial Real Estate Market Monitor Report.
“The picture continues to brighten for the commercial real estate market, as more investors take advantage of the current low-interest rate environment and drive transaction volume and pricing upward across all of the major sectors,” said Auction.com Executive Vice President Rick Sharga. “Even the sectors that are beginning to level out in terms of transaction growth are performing better than they have in the past five years.”
According to the report, CRE deal volume is healthy – up from recessionary lows and led by the historically dominant office sector. The total combined commercial volume in the office, retail, apartment, industrial and hotel sectors reached $81.6 billion in the second quarter of 2014, up nearly 14 percent from a year ago. Office and apartment transactions combined to account for more than 55 percent of the five-sector total, similar to a year ago, though the apartment sector’s portion of that volume has shrunk. Meanwhile, retail transactions made up 16 percent of the total.
Property pricing is also on steady upward trend across all sectors, with industrial pricing leading the way in terms of gains. A 15 percent year-over-year increase in May 2014 elevated the industrial sector’s price growth to second among the sectors – right behind hotel, which has averaged between 15 and 20 percent year-over-year growth since June 2013. The retail sector saw a surge in price growth in 2013, similar to what industrial is experiencing now, but year-over-year gains have begun to decelerate in recent months as the sector continues to face headwinds including the rise of online shopping and shrinking space needs per customer.
Office pricing continues to make steady headway as the sector maintains the largest share of total CRE transaction volume and runs in the middle of the pack in terms of average pricing and cap rates. Meanwhile the apartment sector’s year-over-year price growth has flattened, reflecting the more mature portion of cyclical expansion for this segment following robust gains in recent years.
“Risk premiums are still higher than they were in 2008, in the midst of the recession and its aftershocks,” said Peter Muoio, managing director of Auction.com Research. “This signals the potential for further cap rate compression even in a presumed higher interest rate environment as the Fed ends its quantitative easing.”
The apartment sector currently offers the lowest risk premium (in the mid 3 percent range), while hotel is the highest, as has been the case in recent years. Cap rates have been trending down recently in all five major property sectors.