By: Ross Moore | Chief Economist, Colliers USA
May data from Real Capital Analytics shows investment sales increased substantially from the previous month–indeed, the same can be said on a year-over-year basis. For all property types (including hotels and development sites), May dollar volume registered $15.3 billion, $3.6 billion more than April and up over 120 percent from May 2010.
Across all property types (with the exception of development sites), sales were up month-over-month, although to varying degrees. Retail and hotel were up sharply, with trades increasing 76.1 percent and 62.8 percent respectively. Industrial followed, up 28.1 percent; office increased 23.9 percent; and apartment was up 10.5 percent. Year-to-date, hotel sales are up the most relative to the same period year–increasing 164 percent, followed by office up 126 percent. Properties being brought to the market slipped slightly in May, falling to $23.6 billion at month’s end. This represented a nine percent drop over the month, but a 72 percent increase from May 2010. Over the month, the only property type which registered an increase in offerings was office, rising by $2.3 billion or 28 percent.
Capitalization Rates Generally Down
May capitalization rate (cap rate) data shows rates continue to trend down. Central Business District (CBD) office cap rates dropped 12 basis points during the month to register 6.60%, while suburban cap rates decreased 14 basis points to average 7.67%. A year ago, CBD cap rates were 7.46% and suburban were 8.22%. Multi-family cap rates registered a modest decline, dropping 6 basis points to 6.37%. A year ago apartment cap rates were 6.80%. Industrial warehouse cap rates moved 4 basis points lower, finishing the month at 7.93%, while average retail strip cap rates jumped by 22 basis points to 8.09%. May 2010 industrial warehouse cap rates were 8.50% and retail strip cap rates were 8.32%.Starting to skew some of the cap rate data is the increase in subprime or tertiary market transactions which does produce some sample bias. Going forward this will be an important consideration, but for now, retail appears to be the only property type exhibiting this behavior.
Sales Volume Expected to Go Substantially Higher as Liquidity Returns
After a modest drop in April, this month’s data reinforces our view the investment sales market is still in a secular uptrend. Investors remain positive on the outlook for commercial real estate, and–despite some of the troubling signs seen in the general economy–have not changed their minds as to the attractiveness of income-producing real estate. Pricing is certainly getting more challenging for buyers, but with competitive fixed income products such as 10-year Treasurys dipping below 3.00%, real estate at even sub-6.00% remains highly attractive. Offerings will continue to rise as sellers see an opportunity to dispose of unwanted properties and asset managers look to rebalance portfolios.
Reversing last month’s move, outstanding distress fell to $181.8 billion–a net change of $4.2 billion during the month. This latest decrease was a result of inflows totaling $3.1 billion and outflows (resolutions) totaling $7.3 billion. Distress now ranges from 15 percent of total sales for office, to 34 percent for retail. Looking to the balance of 2011, investment sales volume is expected to increase still further as investors remain hungry for yield, and price discovery in more illiquid markets gives investors more confidence to venture beyond coastal and Texan markets. For 2011, we are still sticking with our projection that full-year sales will 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.