RCA’s U.S. Capital Trends Report Q1'18 was released this
week. With the kind permission of RCA, here are some of the
highlights:
The Big Picture
· Deal
volume is growing again with a change in attitude for certain markets and
property types.
· Deal
volume is up sharply in Manhattan, for instance, after double-digit declines in
activity in 2017. Buyers and sellers are simply coming closer together on price
expectations. In Manhattan in particular, this change in seller
expectations is helping to push a modest decline in prices.
· A
modest decline in prices is not the same as sellers capitulating to
double-digit declines in prices as during the last downturn. Fear of that sort
of activity had unnerved investors over the last five quarters when volume was
dropping. With ongoing declines in volume, there was an expectation of a next
shoe to drop. The nature of the volume decline was not some negative reaction
to an external economic shock however, rather it was a cooling of deal volume
following a surge when properties were underpriced.
· The
apartment sector was the largest, most liquid commercial property market in
Q1’18 and even in this top spot apartment deal volume increased 25% YOY.
· The
strongest growth in deal volume came for the hotel sector which saw deal volume
climb 63% YOY for the quarter. One factor these sectors have in common is a
lease structure that resets frequently which may provide an inflation hedge.
· Deal
volume in the office sector fell 12% YOY in Q1’18 as buyers and sellers are
still often too far apart on pricing expectations. The RCA CPPI for the office
sector did grow on a YOY basis, but prices fell in Q1’18 relative to Q4’17.
RCA
CPPI Price Trends
·
Price growth was not uniform across markets or
market tiers over the last year. As a group the 6 Major Metros generally post
stronger growth than secondary markets, but non-major market price growth has
taken the lead in the past year.
Industrial
· Investors continue to be enamored of the industrial
sector. The level of deal activity seen in Q1’18 was the strongest the sector
has ever seen for any first quarter. The strongest growth came from portfolio
and entity-level deals.
· Megadeals played an important role in the deal
activity seen in Q1’18, but they were not the sole factor driving the
industrial sector to record heights in the quarter.
· Reflecting this investor interest, industrial
property prices are growing at an accelerating pace.
Apartment
· The apartment sector was the largest, most liquid
commercial property sector in Q1’18. The scale of deal volume was such that
apartment investment was 27% higher than office investment. Other sectors
posted stronger year-over-year growth rates, but these were cases of small
numbers growing quickly.
· This late in the cycle few expected that the
apartment sector would continue to show vitality in the way of transaction
activity
· Growth in apartment deal volume and prices in the
face of uncertainty over future interest rate trends can be a sign of
investment capital seeking out safer assets
Office
· The headline figure of a sharp year-over-year
decline in office deal volume in Q1’18 is somewhat misleading. Only certain
deal structures face challenges. The story for Q1’18 is that office price
growth is picking up steam as deal volume grows in key locations.
· Portfolio and entity-level transactions fell 50%
YOY in Q1’18.
· It is harder to complete deals with high sticker
prices in periods of uncertainty as the interests of buyers and sellers are
less aligned.
· The RCA CPPI for the office sector did post
stronger year-over-year growth in Q1’18 than in Q4’17.
Retail
· The headline figures for the Q1’18 decline in
retail deal volume are somewhat misleading. One entity-level transaction in
Q1’17 was too high a hurdle to clear in the past quarter. This said, investors
are still cautious about the sector and the trend is towards falling deal
volume.
· The outsized impact of portfolio and entity-level
transactions can be especially pronounced in periods when deal volume for
single asset sales is lower than usual.
· Looking at trends for the sale of individual assets
is a way to get past the distortions of the megadeals. Here the signal is not
one of strength, but the trend for the quarter is not as bad as the total
market headline.
Hotel
· The hotel sector posted the strongest growth in
deal volume across major property sectors in Q1’18. There are reasons to be
excited by the performance of the hotel sector, but do not get too excited by
the headline figures. The growth was boosted by portfolio transactions.
· In Q1’18 there was clearly investor interest in the
hotel sector, though the portfolio deals overstate this interest
· Looking at trends for the sale of individual assets
is a way to get past the distortions of the megadeals. Here the signal is good,
just not as good.
**
Thanks...
· The feedback I have received on the 'Interviews'
has been terrific! I have a number more 'in the works' and will continue
to publish them. One of the wonderful, and unexpected by-products, has
been several people telling me they've heard from people that they used to work
with or be in contact with - that they haven't connected with in a long
time. Also, some wonderful 'side' stories - often relating to how very,
very small our global commercial / institutional real estate industry truly is.
Felix / Weiner Women on Board
Following up on our recent announcement
of the launch, we are just about ready to launch registration pages on our
website for commercial real estate women to indicate their interest in and
qualification for seats on boards of directors, advisory boards, investment
committees and other places where female diversity is sought. Also, firms
will be able to register their interest in us connecting them with these
women.
This has been developed as a service to
the industry, a give-back of sorts. I was going to create an official
501c3 charitable entity until my accountant told me how much that would cost!
Liz and I will update you when the
registration form are live.
 |
| Austin Texas - Liz and I were there recently. The amount of new construction going on is wild. Seems like between Austin and Dallas more new jobs are being created than anywhere else in America. One of them a new home for Amazon? |
