According to Rick Sharga, EVP of Auction.com, “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. 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.”
The report shows that CRE deal volume is 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, up nearly 14% from a year ago. Office and apartment transactions combined to account for more than 55% of the five-sector total, similar to one year ago, though the apartment sector's portion of that volume has shrunk. Meanwhile, retail transactions made up 16% of the total.
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Property pricing is also on a steady upward trend across all sectors, with industrial pricing leading the way in terms of gains, according to the report. A 15% year-over-year increase in May elevated the industrial sector's price growth to second among the sectors—right behind hotels, which has averaged between 15% and 20% 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-ago 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, the report shows. 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.
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Auction.com Research's risk-premium calculations show a slight decline from a year ago and, more significantly, from two years ago. “Risk premiums are still higher than they were in 2008, in the midst of the recession and its aftershocks,” notes 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% range), while hotels is the highest, as has been the case in recent years.
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In addition, the report finds that cap rates have been trending down in all five major property sectors recently. Values are now below their 10-year average, and apartment cap rates are currently at a 10-year low point. Hotels is the only sector that has seen rates rise modestly in the past few years.
Stay tuned for an upcoming interview with Rick Sharga about what the report findings indicate for the future of commercial real estate.
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