Friday, April 27, 2018

RCA U.S. Capital Trends Report: Highlights Q1'18 >> Felix / Weiner Women on Board

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.

·       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.

·       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

·       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.

·       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.

·       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.

·       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?

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