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Commercial real estate sales approached record levels in 2015, study suggests

A flurry of data released this month suggests that commercial real estate deal volumes reached near-record levels in 2015, and a run-up in prices continued in the major cities — but analysts have mixed opinions on what 2016 will bring.

On the one side are those who say that a six-year string of growth in sales that pushed up commercial property prices beyond precrisis peaks can’t continue much longer. Others point to solid property fundamentals, the improving job market and continued interest from investors as reasons for optimism.

Sales volume of significant properties (assets valued above $2.5 million) ended the year at $533 billion, which is up 23 percent compared to 2014 and only lagged behind the peak year of 2007, Real Capital Analytics (RCA) reported. RCA Senior Vice President Jim Costello said the strong fourth-quarter sales suggests that a slowdown in sales over the summer reflected the usual seasonal pattern  — and not so much that market was losing momentum. In the fourth quarter of last year, the transaction volume totaled $157 billion, up 20 percent year over year.    

"In the summer, the corporate bond markets had some trouble," Costello said. "Rates went up, and the CMBS [commercial mortgage-backed securities] market responded with higher rates on newly originated loans. There were some deals in place that people probably delayed on." 

The RCA report noted that investors have been jittery at recent industry conferences. Costello said he doesn't agree that the market must necessarily decline precipitously because prices have reached new highs and cap rates have fallen.

"That is a simplistic view of it," Costello said. "As long as there is no outside shock to the capital markets that would disrupt the flow of capital to any portion of the capital stack, it doesn’t inevitably have to follow that same downturn path." 

Costello said buyers might pull back, however, as interest rates rise because the spread between the cost to borrow money and the expected returns will narrow. 

"It might impact volume, with sellers holding at the prices that other comparable assets have achieved of late, and buyers stepping back a bit, maybe wanting that discount or just being more selective," Costello said. On other other hand, Costello said, many owners may be forced to sell in the coming year as a large wave of loan maturities hits the market in 2017.  

Price growth has slowed somewhat. Prices rose 12 percent year over year in the fourth quarter, RCA said. Commercial real estate prices rose 17 percent and 16 percent year over year in 2013 and 2014, respectively. The Moody’s/RCA Commercial Property Price Indices and CoStar reported year-over-year prices gains in November of 14.7 percent and 12.2 percent, respectively. The Green Street Commercial Property Price Index was unchanged in December, but was up 10 percent year over year.

Market jitters 

Some analysts doubt this hot streak will continue, however.

In a January report, Peter Rothemund, senior analyst at Green Street Advisors, said “investors would be wise to discount a continuation of that streak in 2016,” noting that cap rates on commercial property “look too low at today’s levels.”

“Higher cap rates — which mean lower property values — seem like a very real possibility in 2016,” Rothemund said.

Ken Riggs, president of Situs RERC, said investors are noting the record prices and lower returns, and are gently pulling back. He said the most recent sales data reflects deals that were struck three to six months ago, and so “a pause” might not be reflected in the data for a few more months.

“Prices have been pushed, in many cases, higher than they have ever seen,” Riggs said during a telephone interview. “Rate of returns have been pushed down, basically, as aggressively as you can. The third piece is that there is not this fever pitch to get out capital like there was in the last cycle.”

Riggs said, however, that commercial real estate still has broad appeal as an income-producing asset and alternative to the volatile stock market.  

“You are going to see a very careful pullback on doing deals,” Riggs said.“I know there are some deals that have been re-priced."


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