Commercial real estate activity rises in 2Q, but prices flatten
Commercial real estate transaction volume rebounded in the second quarter from a poor first three months of 2019, although property price growth plateaued, according to Ten-X Commercial.
Deal volume for the second quarter totaled $136.8 billion, up 24% over the first quarter and 10% year-over-year, driven by increased activity in the multifamily and office sectors, according to an analysis by Ten-X of Real Capital Analytics data.
In the second half of 2018, increased merger and acquisition volume lead to a surge in CRE deal activity. But that changed direction in the first quarter.
"A slowdown in the previously thriving M&A market prompted cooling in total first-quarter 2019 CRE transaction volume," said Ten-X Chief Economist Peter Muoio in a press release. "However, there was a resurgence in the second quarter of the year with the apartment sector leading the way in overall deal volume, totaling more than $43 billion in the second quarter."
Property pricing among all five CRE sectors has plateaued, Muoio added, citing August data from Ten-X. Pricing was down a scant 0.1% from the same month last year, which was the first annual decline since mid-2018.
Hotel pricing was down 1.8% from August 2018, while retail properties saw deal prices down 0.3%. On the other hand, industrial properties had a year-over-year price increase of 0.6% and multifamily rose 0.9%.
"Property pricing among all CRE segments is at a virtual standstill," Muoio continued. "This is for a variety of reasons, with the trade war with China and escalating tariffs that affect the industrial sector and the recent yield curve inversion sparking fears of a recession and spooking investor sentiment across all CRE segments, key factors."
Cap rates, the ratio of net operating income to property asset value, remained unchanged from the first quarter because of the Federal Open Markets Committee decision to cut short-term rates in July. However, the spread between cap rates and interest rates continued to grow.
"Cap rate spreads have widened in the past few quarters, reflecting worsening investor sentiment across CRE," Muoio said. "This is likely due to the uncertainty brought on by the U.S.-China trade war and recent yield curve inversion, which has increased investor unease for a potential recession."
But investor sentiment remained positive when it came to the multifamily sector, as millennials leave their parents' homes and enter the rental market.
"Unlike other sectors falling victim to changing technologies and trends, multifamily remains largely unaffected by such major structural changes to space usage," Muoio said. "Apartments provide individuals with an increasingly desirable option to rent over own, allowing for a flexible lifestyle which many young people crave. These lifestyle shifts have investors keen on these types of properties."