Commercial Real Estate Transaction Activity Increases For Second Straight Quarter In Q4, Ten-X Research Reveals

Commercial real estate continues to benefit from a healthy labor market, as labor force participation is on the rise and the national unemployment rate is below 5 percent. However, the economic stability the country has enjoyed for several years is now in question due to uncertainty created by a number of paradigm shifts, including rising interest rates and a new presidential administration that has promised radical policy changes.

"For years, a slowly expanding economy has been a boon to commercial real estate, driving unprecedented periods of growth in many areas of the market. After years of smooth sailing, however, the industry could be headed for stormier waters," said Ten-X Chief Economist Peter Muoio. "The Fed's stated plans to raise rates in 2017 and the prospect of wholesale changes to trade, immigration and tax policies are contributing to a level of uncertainty the market has not witnessed for years. While commercial real estate remains in a period of steady growth at the moment, investors should be aware that this enduring stretch of stability may be nearing its end."

CRE Transaction Volume Increases in Q4

The increase in deal volume during Q4 marks a second consecutive quarter of growth, a welcome rebound after steady declines during the first half of 2016. Healthy investor confidence levels have kept transaction volume above $100 billion in every quarter since 2014, though this quarter's total was 19.6 percent below that of Q4 2015, when a flood of year-end deals drove the sector to its current cyclical peak.

All five market sectors significantly outperformed their 10-year total dollar volume averages during the quarter. A thriving apartment segment comprised the largest portion of deal volume, with the sector accounting for 34.7 percent of all transactions. Office and industrial posted volume growth of 15.6 percent and 15.1 percent in Q4, with their shares of  total transactional volume roughly in line with historical norms. Retail and hotel were the only sectors to see deal volume and their share of deal volume decline..

Property Pricing

Buoyed by high liquidity levels and solid fundamentals, property valuations are now up 9.1% year-over-year as of December, per the Moody's/RCA Commercial Property Price Index (CPPI). Following robust growth throughout most of 2016, the Ten-X All Property Nowcast, which gauges national pricing through a combination of proprietary and third-party data, reveals pricing has since slowed significantly, including three straight months of flat or minimal growth dating back to December. Despite the recent slump, year-over-year pricing is now up 8.1 percent, and the All Property Nowcast remains at an all-time high.

The Ten-X CRE Apartment Nowcast continues to surge, having increased 16.2 percent over the past year. Driven by low homerownership rates and high student debt, which is causing millennials to choose renting over buying homes. The sector has posted pricing growth in 14 consecutive months. CPPI also places the sector's pricing at an all-time high, placing it 52 percent above its prior cyclical peak. Apartment's strength and stability have helped it consistently generate the lowest cap rates and risk premiums of any sector, though Ten-X Research shows that the current trajectory is likely unsustainable. At particular risk are several large cities, such as New York City, San Francisco and Miami, where the threat of oversupply has begun to lift vacancies and cool rents. While other markets maintain a stronger outlook, shifting fundamentals and rising interest rates suggest property pricing may downshift after a record run of expansion.

Along with apartment, office and industrial are once again at peak price index levels after a brief slowdown, with CPPI reporting pricing in these sectors is 20.9 percent and 13.8 percent higher than their prior cyclical peaks. Despite declining in January, the Nowcast measures office pricing at just below its all-time peak, though it boasts the highest year-over-year growth of any sector at 18.5 percent. Conversely, industrial price growth slowed dramatically throughout 2016, according to the Nowcast, and has increased a modest 5.5 percent over the last year.

Retail and hotel, meanwhile, continue to see pricing lag, as they deal with lasting shifts in consumer behavior. Retail, which is facing significant headwinds as customers increasingly turn to e-commerce, saw pricing growth slow in 2016, posting a year-over-year gain of just 7.6 percent as of January, per the Nowcast. CPPI shows that the sector's prices have declined in three of the past five months, and they now stand a full 1.7 percent off their recent cyclical peak.

Meanwhile, competiton from online-based competitors, such as AirBnb, continues to harm the hotel industry. An abundant supply pipeline and slowed growth in per-room revenues have contributed to hotel valuations declining in 11 of the last 15 months, and the Nowcast shows overall pricing down 9.2 percent from its peak level.

Risk Premiums Fall Sharply Across All Sectors

Risk premiums fell across all five CRE sectors during the fourth quarter, thanks in part to a swift rise in the 10-year Treasury rate during the fourth quarter. The rate now sits at 2.49 percent – its highest level since 2014 – reflecting the Fed's December interest rate hike and increased inflation expectations. Despite the recent deceleration in wage growth, the Fed has promised to increase rates three more times during 2017.

The apartment sector saw the largest dip in risk premiums during the fourth quarter, with a 90 bps decline, dropping them to their lowest levels in over five years. Hotel and retail each saw declines of 70 bps, while office and industrial recorded drops of 60 bps. With its various challenges, the hotel sector easily retains the highest premiums, and is the lone segment that measured above its 10-year average.

Cap Rates Increase in Four of Five Sectors

Boosted by rising treasury yields, cap rates increased in four of the five sectors during the fourth quarter, with only apartment seeing a slight 10 bps downtick. Increases across the rest of the industry were fairly uniform, with office and industrial rising just over 20 bps and retail and hotel seeing hikes of just under 20 bps, per RCA data. Hotel's current rate of 8.58 percent is easily the highest of any sector, while apartment maintains the lowest, at 5.59 percent. Hotel also remains the sole CRE sector with a rate above its 10-year average.

About Ten-X

Ten-X is the nation's leading online real estate transaction marketplace and the parent to Ten-X Homes, Ten-X Commercial and Auction.com. To date, the company has sold 275,000+ residential and commercial properties totaling almost $46 billion. Leveraging desktop and mobile technology, Ten-X allows people to safely and easily complete real estate transactions online. Ten-X is headquartered in Irvine and Silicon Valley, Calif., and has offices in key markets nationwide. Investors in the company include CapitalG (formerly Google Capital) and Stone Point Capital. For more information, visit Ten-X.com.

SOURCE Ten-X

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