By: Ross Moore, Chief Economist – Colliers International USA
October data from Real Capital Analytics confirms the investment sales market continues to show rising activity. For all property types, October dollar volume registered $12.5 billion, a 5.9% increase from September and more than double year-ago levels. October’s numbers were somewhat skewed by the sale of the $4.0 billion Extended Stay Hotel portfolio which helped to more than triple hotel sales for the month. Retail investment volume was also up month-over-month, rising 49.9%, however office was down 44.3%, multi-family was down 26.3% and industrial was off 26.0%. On a year-over-year basis with the exception of retail, all property types for the month of October were up sharply. In contrast to sales, October offerings fell by 5.8% from September levels.
Capitalization Rates Mixed
October capitalization rate (cap rates) data showed no clear trend. The average composite commercial and multi-family cap rate came in at 7.24%, up modestly from 7.18% in September but down significantly from a year ago when the average was 8.12%. CBD office cap rates climbed 35 basis points during the month to register 6.56% while suburban cap rates dropped 42 basis points to average 7.17%. Strip retail cap rates moved 41 basis points lower finishing the month at 7.65%, while multi-family dropped by 26 basis points to average 6.39%. Industrial warehouse cap rates registered a modest move rising 11 basis points to 8.44%. While monthly movements varied by property type every sector posted lower cap rates in October relative to a year ago.
Sales Volume Still Tracking Higher But the Big Jump in Activity is Likely Done
The trend in investment sales is certainly still up but the large gains experienced earlier in the year is probably over. Offerings are no longer rising like they were in the first part of the year and buyers have become more cautious as cap rates have fallen and prices have risen. Distressed sales are still a feature of the market and jumped this month because of the Extended Stay Hotel portfolio, but even after this month’s increase, troubled asset sales are still just 20% of total sales (on a 6 month rolling basis). The credit markets continue to be accessible, and investors have a little more comfort with respect to improving real estate fundamentals but the market remains highly fragmented between top grade real estate, bottom grade real estate and everything else. Looking to the last two months of the year investment sales volumes are anticipated to be in the $12-15 billion range per month leaving full year sales at a little over $100 billion. By contrast 2009 sales were just $55 billion. Slowly the market is returning to what could be described as “normal”.
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.