NEW YORK CITY-The phrase “a rising tide lifts all boats” applied generally to sales of significant commercial real estate in 2013, but it seems as though a variation on the old saw would be even more relevant. That is, a rising tide lifts the most rickety boats the highest, as Real Capital Analytics‘ review of the year found there was an especially strong rebound for the property types and markets that had been the weakest in terms of recovery.
This rebound occurred amid a 19% year-over-year increase nationwide in commercial property sales worth $5 million or more. New York City-based RCA said the year’s tally reached $355.4 billion, while the Moody’s/RCA Commercial Property Price Indices were expected to post a 15% increase nationally Y-O-Y.
Driving the resurgence in markets and property types that time forgot was investors’ appetite for risk and higher yields. “Las Vegas is a prime example and it posted the largest price and volume gains of any market,” according to RCA’s “Big Picture” report. “Atlanta, Tampa, Sacramento and even some of the tertiary markets also outperformed. Riskier property types such as unanchored shopping centers, resorts and limited-service hotels, and suburban offices also experienced strong rebounds.” If the trend continues, Vegas along with Phoenix, Jacksonville and Sacramento “are poised to outperform again in 2014.”
This attention to secondary and tertiary markets did not take anything away from demand for core properties in core markets, however. Led by the $1.36-billion sale of a 40% stake in the General Motors Building at 767 Fifth Ave., four of the year’s top five single-asset deals were for Midtown Manhattan office towers, with New York City retaining its favored-market status along with San Francisco, Boston and Houston, according to RCA.
“Overall, the trends collectively portray an investment environment that has nearly fully recovered, and certainly there is no lack of equity or debt capital,” according to RCA’s report. Yet the report points out that with the exception of multifamily, leasing fundamentals haven’t recovered yet. Therefore, RCA says, “investors should look more toward a rebound in those fundamentals rather than improvements in the capital markets to push prices higher.”
The corollary to that admittedly made-up variation on the rising-tide metaphor is that price appreciation over the past year varied widely from market to market. In the multifamily sector, for example, while Vegas saw 65% Y-O-Y growth in pricing, some cities—including Chicago, Denver, Seattle and Orange County in California saw prices rise by only single-digit percentages during that time.
Over the past year, sales of significant apartment properties totaled $103.5 billion, up 18% over 2012 and within shouting distance of the $105.7-billion watermark achieved in 2007. Although pricing for multifamily properties came in 5% ahead of peak levels, RCA reports that price appreciation has started to moderate of late, while “volume has tempered with recent gains driven by large portfolio transactions.”
The fourth quarter of ’13 brought more than one-third the year’s tally for office deals, which reached $36.9 billion during Q4 and $101.5 billion for the year. Prices for both CBD and suburban assets showed comparable levels of appreciation, but although CBD prices are now slightly higher than they were at the market’s peak, those for suburban office properties are still 25% below peak levels.
Sales of significant industrial properties totaled $47 billion this past year, a 16% Y-O-Y increase. There was little movement in cap rates for the sector during the year, and price appreciation was also modest. RCA says it expects the Moody’s/RCA CPPI to show a 5% increases nationwide for the year. “The industrial sector continues to trail the other property types in volume and price trends and it has had the weakest recovery so far with prices currently 22% below peak levels,” according to RCA.
The leading sectors, albeit for two different metrics, were retail and hotel properties worth $5 million or more. RCA’s report says retail pricing is expected to post a 23% Y-O-Y gain, well above that of any other property type. Hotels led the way for increases in sales volume: the 12-month total of $26.1 billion represented a 28% rise over the year prior, higher than any other sector.