By: Ross Moore | Chief Economist, Colliers USA
First-quarter data from Real Capital Analytics shows investment sales market trade activity continuing to increase. For all property types, first-quarter dollar volume registered $31.4 billion, a 68.8% increase from Q1 2010. Indeed, this quarter’s sales were almost three times the level of Q1 2009, when the market had hit bottom.
Not surprisingly, all property types registered healthy increases on a year-over-year basis. Office and hotel in particular were both up sharply; with trades increasing 127% and 126% respectively. Retail followed, up 53%, land 51%, multi-family 47% and industrial 11%. Properties being brought to the market also increased in the first quarter, hitting $51.4 billion by quarter’s end. This represented a further increase from Q4; offerings are quickly approaching levels nearly double those of Q3 2009. Over the quarter, hotels were the only property type that registered a drop in offerings.
Capitalization Rates Mixed
First quarter capitalization rate (cap rate) data showed no clear trend. The average composite commercial and multi-family cap rate came in at 7.18%, unchanged from the fourth quarter, but down quite significantly from a year ago when the average was 7.74%. Central Business District (CBD) office cap rates climbed 8 basis points during the quarter to register 6.39%, while suburban cap rates increased 7 basis points to average 7.58%. A year ago, CBD cap rates were 7.51% and suburban were 8.36%. Strip retail cap rates moved 61 basis points lower, finishing the quarter at 7.64%, while warehouse cap rates dropped by 22 basis point to average 7.97%. First quarter 2010 retail strip cap rates were 8.48% and industrial warehouse cap rates were 8.70%. Multi-family cap rates registered an upward movement, rising 12 basis points to 6.66%. A year ago apartment cap rates were 6.86%.
Sales Volume Set to Track Higher
With Q1 sales significantly higher than the same period a year ago, and investor appetite still very healthy, the trend in investment sales is strongly upward. Offerings continue to rise and buyers of all stripes show heightened interest in anything that resembles core real estate. Buyers in top-tier markets appear more comfortable with taking on vacancy, and are pricing in rent spikes within a four- to five-year time period. Core pricing is now firmly in the 5.5% to 6.5% range, and anything that offers a reliable cash flow is attracting multiple bids from almost all buyer groups.
Distressed sales are a growing feature of the market, with distress rising in the first quarter to $180.7 billion — a net change of $367.6 million. This latest increase was a result of inflows totaling $14.9 billion and outflows (resolutions) totaling $14.5 billion. Troubled asset sales slipped to below 20% of total sales in the first quarter; however, with lenders more willing to address problem loans, troubled asset sales are expected to be back above 20% in the coming quarters. The credit markets continue to open up, with abundant capital for the right asset. Insurance companies in particular remain very active, and the surprising comeback in the CMBS market is providing a significant tailwind. Nonetheless, the market remains highly fragmented between top-grade real estate, distressed assets and everything else. In some coastal markets, however, investors are beginning to show interest in value-add properties. Looking to the remainder of 2011, investment sales volumes are anticipated to be $50+ billion per quarter, with full-year sales at approximately $200 billion. By comparison, 2010 sales were $136.6 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.