By: Ross Moore | Chief Economist, Colliers USA
Second-quarter data from Real Capital Analytics shows investment sales surged well above levels of a year ago, and fell only slightly short of the quarterly post-financial-crisis high set in the fourth quarter of last year. For all property types, second-quarter dollar volume registered $55.6 billion, a 117% increase from Q2 2010 and only $3.3 billion below the fourth quarter of 2010, when sales activity surged.
Not surprisingly, all property types registered healthy increases on a year-over-year basis–although suburban office saw only a single-digit increase, quarter-over-quarter. Retail, and in particular strip retail, was up sharply, with trades increasing 406% and 669% respectively. Hotel followed, up 169%, multi-family 143%, industrial 75% and office 53%. Properties being brought to the market also increased in the second quarter, hitting $76.5 billion by quarter’s end. This represented a considerable increase from Q1 when offerings totaled $51.7 billion and are now at their highest level since Q2 2008. Over the quarter, offices in particular saw a dramatic rise in offerings.
Capitalization Rates Continue to Track Lower
Second quarter capitalization rate (cap rate) data shows investors continue to drive up prices and push cap rates lower. The average composite commercial and multi-family cap rate came in at 7.11%, down 11 basis points during the quarter and down quite significantly from a year ago when the average was 7.65%. Suburban office cap rates dropped 40 basis points during the quarter to register 7.64%, while Central Business District (CBD) cap rates increased 18 basis points to average 6.42%. A year ago, suburban cap rates were 8.35% and CBD rateswere 6.71%. Warehouse cap rates moved 15 basis points lower, finishing the quarter at 7.93%, while multi-family cap rates dropped by 19 basis points to average 6.44%. Second quarter 2010 warehouse cap rates were 7.93% and multi-family cap rates were 6.88%. Retail strip cap rates registered an upward movement, rising 19 basis points to average 7.93%. A year ago strip cap rates were 8.05%.
Sales Volume Set to Track Higher
With Q2 sales up sharply, and investor appetite for income-producing real estate still unsatisfied, the trend in investment sales continues upward strongly. Offerings continue to increase and buyers show heightened interest in anything that resembles core or core-plus real estate. Buyers in top-tier markets continue to be more comfortable with current or imminent vacancy in the belief that occupancies have stabilized and will increase. Pricing in major coastal markets is now firmly in the 5.5% to 6.5% range, and for high-quality real estate in top locations, cap rates below 5.0% and even 4.0% are now being witnessed.
Outstanding distressed real estate ticked down during the quarter, falling $3.6 billion to finish Q2 at $180.4 billion. This drop in distressed real estate was a result of inflows totaling $12.2 billion and outflows (resolutions) totaling $15.8 billion. Approximately $9.4 billion of distressed real estate sold in the second quarter, bringing year-to-date sales to $15.6 billion, more than twice the $6.9 billion of distressed sales recorded in the first half of 2010. Distressed sales accounted for 17% of all sales in the first half of 2011 in dollar terms and 19% by numbers of sales. Helping to deal with the onslaught of distressed real estate is the credit markets which continue to improve including the heralded come-back of the Commercial Mortgage Backed Securities (CMBS) which remains on track to exceed $40 billion by year-end.
The market remains highly fragmented between top-grade real estate, distressed assets and everything else, but as investors’ willingness to accept more risk increases, the gap between the three continues to narrow. Looking to the remainder of 2011, investment sales volumes are anticipated to easily reach $200 billion, or nearly 50 percent above 2010 levels.
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.