Soaring Sales Transactions Propel Volumes

NEW YORK CITY-The fourth quarter of 2012 saw a great deal of uncertainty related to global economic challenges, however, clarity appears to have arrived in the final days, sparking investors to close deals before year-end.  In fact, investor activity for all property types propelled preliminary volume estimates to their highest level in five years. 

Volumes for core property types are currently close to $78 billion for the fourth quarter, up over 40%  annually and bringing total volumes for the full year above $200 billion, representing over a 20% increase. The much higher than expected volume is attributed partly to anticipated capital gains tax increases, which prompted motivated sellers to pull forward investment activity from 2013 into December.

Interest rates and government yields remain low and office investment activity continues to be supported by an attractive lending environment. Further Fed action should continue to benefit spread products and CRE investment overall at least through most of 2013. Other capital providers such as life insurance companies and US banks currently remain active in primary markets, and CMBS helps fill the funding gap particularly in secondary and tertiary markets.    

Most primary markets set a solid pace in office transaction volumes in 2012, but there's been a marked increase in sales activity in the purchase of CORE product outside of traditional gateway metros. While Manhattan and Washington, DC have taken the most notable pause, markets such as Seattle and Austin have surged ahead with transaction volume levels well above prior years. Current office market transaction volumes in these markets continue to be driven largely by strong technology and energy growth, which we expect to continue into 2013 and beyond.  

As the number of top-quality deals remains limited, there is increased evidence of investor willingness to move further along the risk curve. For 2012, share for secondary market activity for the office product now closed at 45%, compared to 38% a year ago, with primary share dropping by 10 percentage points to 49%. Given the growth drivers mentioned (and additional ones like housing-related industry growth), we expect a further increase in secondary market investment activity as values in these areas gain more ground.         

As overall investment activity is expected to remain positive but slow in 2013, investors could be expected to hold properties longer. Whether in a primary or secondary market, safety and stability remains favored in highly-occupied properties. This is evidenced by the average 90%-plus occupancy rate for better-quality office assets transacted during the fourth quarter coming in significantly above that for the overall national office market.   

Although clarity is starting to form, some near-term uncertainty will likely cap the amount of product that trades in the first quarter.  Despite that, we remain cautiously optimistic that growth in investment activity in the first quarter will continue to grow, but the rate of increase will slow from fourth quarter levels. As we push through these uncertain barriers and define more clarity, volume should pick up headed into the second half of the year.

Marisha Clinton, is director of research at Jones Lang LaSalle Capital Markets' New York City office. The views expressed in this column are the author's own.