NEW YORK CITY—Second-quarter investment sales volume was predictably off on a year-over-year basis in the Q2 US Capital Trends report from Real Capital Analytics. However, RCA cautions industry members not to make too much of the 5% Y-O-Y drop.
It’s been 10 years since the Blackstone Group took Equity Office Properties private, a $39-billion buyout which RCA calls “the high-water mark of deal activity in 2007.” In that context, RCA says it’s instructive to look at the downward spiral following that epoch-making deal in order to get “some perspective on the fear that the current slide in activity presages a collapse in pricing just like that seen in the last downturn.”
In the current cycle, volume peaked in Q4 2015. Analyzed on a four-quarter trailing basis to control for seasonal variations, volume is now 13% lower than the Q4 ‘15 peak.
“Six quarters after the peak in Q4’07, deal volume had already fallen 83%,” “So the current deal slowdown is nothing like the previous cycle and one should not fret that prices will follow the same path.” In fact, prices were up 7.3% Y-O-Y in the most recent RCA CPPI.
One factor behind declining even as prices continue rising is a mismatch between buyers and sellers’ expectations for pricing. “It was easy for price expectations to align when cap rates were falling and the Federal Reserve was being accommodative,” according to the USCT. “Buyers exhibit more caution today, given the current uncertainty on the rate environment.”
There’s also less motivation to sell than there was in the previous cycle—and especially as that cycle cratered with the global financial crisis. “Into 2008 and 2009 as loans came due and few lenders were active, many investors had no option but to sell,” the report states. By contrast, today’s lending markets are “vastly more stable.”
The pricing landscape for the first half of 2017 becomes more varied when looking within property sectors. “There are unique stories of changes in buyer and seller preferences across every sector in H1’17,” according to RCA. “The normal view is that deal volume and prices move together, but this relationship has not held for the last two years.”
In retail, for instance, the buyer/seller gap is especially wide. “The H1’17 volume declines were at the same pace as those in H1’16, and the combination with falling prices today suggests that buyers are pulling back on pricing expectations while current owners hold price expectations that are too high,” according to the USCT. A similar gap is seen in mid- and high-rise apartment properties.
Conversely, the suburban office market has posted strong growth in deal volume along with steady price growth. Yet RCA notes that the picture is clouded to some extent by portfolio sales, which drove much of the Y-O-Y growth in volume during Q2, especially in the suburbs.
Meanwhile, RCA sees garden apartments, CBD office properties and hotels all in in the phase where prices appreciate as volumes decline. “This pattern suggests an impasse where buyers are pulling back from their interest in the sectors at current prices while owners are not adjusting their price expectations.”