Wells Fargo’s review of the commercial real estate market for the first quarter of 2015, prepared by senior economist Charlie Dougherty, economist Jackie Benson, and economic analyst Ali Hajibeigi, painted a picture of a strong start to the year.
During the first three months of the year, transaction activity increased significantly, buoyed by the interest rate cuts in the fall of 2024 and improved access to capital. Total transactions reached $98 billion, marking an 11.3% gain compared to the first quarter of 2024. This growth was largely driven by a surge in multifamily property transactions, which jumped 35.5%. Industrial properties also saw robust activity, up 24.4%, while hotel transactions climbed 27.1%. The office sector, in contrast, experienced a decline, with transaction volume falling by 17.8%.
Property values showed greater stability, with prices recording modest growth, though they remained below their 2021 highs. The overall price index rose 0.6% year-over-year, representing the first annual increase since the Federal Reserve began raising interest rates in 2022. Using a 2006 baseline, multifamily property prices stood at 200.7, retail at 105.9, industrial at 189.3, overall office at 94.1 and central business district office at 77.7. According to Wells Fargo, these increases reflected optimism that the improvements seen in 2024 would continue.
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Cap rates rose to levels last seen a few years after the Global Financial Crisis. Specifically, it breaks down to 5.7% for multifamily, 7.2% for retail, 6.4% for industrial and 7.7% for office properties.
In terms of fundamentals, multifamily properties reported an overall vacancy rate of 8.1%, with effective rents rising 1.2% year-over-year. Net absorption totaled 128,300 units, closely matched by net completions of 125,900 units. The office sector had a vacancy rate of 13.9%, with effective rents up 1.1% year-over-year. Net absorption reached 7.7 million square feet, while net completions were 4.8 million square feet.
Retail properties posted a vacancy rate of 4.1%, year-over-year effective rent growth of 1.9%, net absorption of negative 3.1 million square feet and net completions of 7.8 million square feet. Industrial properties saw a 6.9% vacancy rate, the highest year-over-year effective rent growth at 2.5%, net absorption of 34.4 million square feet and net completions totaling 62.6 million square feet.
Lending conditions for commercial real estate bank loans improved, especially in the multifamily sector. Only 1.6% of banks reported net tightening of multifamily lending standards, while 12.7% eased standards outright. For nonfarm, nonresidential loans, 10.9% of banks tightened standards, and for construction and land development, 11.1% reported net tightening.
Finally, CMBS delinquency rates varied by property type: 4.5% for multifamily, 12.7% for office, 8.4% for retail, 0.8% for industrial, and 6.3% for hotel.
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