By: Ross Moore | Chief Economist, Colliers USA
April data from Real Capital Analytics shows investment sales fell slightly over the month, but on a year-over-year basis, investment activity continued to trend higher. For all property types, April dollar volume registered $11.1 billion, $2.5 billion less than March, but a 69.8% increase from April 2010. Indeed, this month’s volume extends a 17-month trend of rising year-over-year increases.
Across various property types, however, results were more mixed with no clear trend. Office, hotel and apartment were up sharply, with trades increasing 187%, 99% and 92% respectively year-over-year. Retail followed, up 39%. Posting a modest decline was industrial, falling 6% and land falling a more substantial 35%. Properties being brought to the market also increased in April, hitting $23.6 billion by month’s end. This represented a 67% increase from April 2010. This is the first time offerings have exceeded $20 billion since October 2008. Over the month, all property types registered an increase in offerings, with office in particular rising by just under $3.0 billion.
Capitalization Rates Mixed
April capitalization rate (cap rate) data showed no clear trend. The average composite commercial and multi-family cap rate came in at 7.05%, up just 3 basis points from March, but down quite significantly from a year ago when the average was 7.77%. Central Business District (CBD) office cap rates climbed 8 basis points during the month to register 6.72%, while suburban cap rates decreased 20 basis points to average 7.81%. A year ago, CBD cap rates were 7.35% and suburban were 8.33%. Strip retail cap rates moved 6 basis points lower, finishing the month at 7.79%, while warehouse cap rates held steady at 8.19%. April 2010 retail strip cap rates were 8.11% and industrial warehouse cap rates were 8.65%. Multi-family cap rates registered a modest move higher, rising 17 basis points to 6.19%. A year ago apartment cap rates were 6.30%.
Sales Volume Expected to Go Substantially Higher as Liquidity Returns
Although there was a slight give back in April sales, the overarching trend in investment sales is up. Investors have greatly increased their appetite for commercial real estate and coupled with more, and better access to debt, the investment sales is expected to only get stronger in the coming months. Offerings will continue to rise as sellers see an opportunity to disposed of unwanted properties and asset managers look to rebalance portfolios. Buyers appear to be more comfortable with taking on vacancy, and have moved beyond the Big Six (New York, Washington, DC, Boston, Chicago, San Francisco, Los Angeles) to secondary and tertiary markets. Quoted cap rates for prime real estate in top-tier markets has now firmly gone below 5.0%, and below 4.0% for multi-family. Multiple offers on such offerings are increasingly commonplace.
Distressed sales remain a significant feature of the market, with distress rising in April to $184.6 billion — a net change of $2.5 billion during the month. This latest increase was a result of inflows totaling $5.6 billion and outflows (resolutions) totaling $3.1 billion. The credit markets continue to open up, with abundant capital for the right asset. Insurance companies in particular remain very active with new originations now expected to exceed $45 billion in 2011 — a substantial increase from $35 billion in 2010. Commercial mortgage backed securities (CMBS) continue to surprise on the upside, with 2011 originations already in excess of $12 billion and on track to hit $40-$50 billion by year end. This is proving to be particularly important to secondary and tertiary markets which up until recently have been starved of debt capital. Looking to the remainder of 2011, investment sales volume is expected to increase substantially as investors look for opportunities beyond the Big Six markets. For 2011, full-year sales are expected to reach $200 billion. By comparison, 2010 sales were $138.5 billion.
Ross Moore is the Colliers International’s Chief Economist with a focus on providing bottom-up and top-down analysis of commercial real estate markets across the United States. In addition to his North America wide reports, Ross also authors all global research produced by Colliers.