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Commercial property prices gained steam in 2017

Commercial asset prices ended 2017 significantly higher than during the last boom, but sales activity continues to cool.

Prices posted an aggregate annual gain of 7.1 percent in 2017, ending the year 23.7 percent higher (without adjusting for inflation) than a decade ago during the last market peak, according to Real Capital Analytics’s all-property index. Meanwhile, sales transaction volume declined for the second straight year, to $463.9 billion in 2017.

CREpriceSales volume has dropped by a combined 15 percent from the 2015 peak. RCA’s analysts cautioned against worrying too much about lower sales activity, or that the company’s all-property index is pushing into new territory. RCA tracks assets valued over $2.5 million.  

“The fact that prices are at a new high level does not mean that the market is overvalued,” RCA Senior Vice President Jim Costello told Scotsman Guide News. “One is not likely to find bargains today as a few years ago, but the current price levels for most asset types makes sense relative to the investor demand. There is still a lot of capital globally that needs the type of safe, yield-driven returns available from U.S. commercial real estate.”

Costello said one potential fallout from rising prices will be more construction activity, which should put pressure on rents and could eventually cool off the price gains.

“When prices are high relative to their cycle, construction becomes more feasible for investors,” Costello said. “In some pockets where construction of apartment towers was particularly aggressive — downtown Brooklyn, parts of Seattle — there is evidence that rents are a bit challenged which, in the end, should impact property prices.”

Costello also noted that, when adjusted for inflation, RCA’s all-property index is now only roughly 7 percent higher than its past peak. The weaker sales in 2017 were driven by fewer mega-deals involving multiple properties. Portfolio sales declined year over year by 12 percent, to $109.4 billion, and single-asset sales dropped by 5 percent, to $354.5 billion, RCA reported. The overall sales volume for 2017 was still robust and higher than the 2014 level.

Notably, prices for apartment buildings rose by 10.6 percent in 2017, even as the deal volume slipped by 7 percent, to $150.1 billion.

Not all asset types saw declining deal volume. The industrial sector posted a 20 percent annual gain, to $72.2 billion.

Looking ahead to 2018 and 2019, most analysts are optimistic that the commercial real estate market will remain stable, citing solid leasing terms and generally low vacancy rates. 

Most analysts also are predicting a boost from tax reform. The Republican-sponsored tax-reform package significantly cut corporate taxes, and also preserved most of the incentives for owning commercial real estate.

“I see continued interest and activity in U.S. commercial real estate from the tax reform,” said George Ratiu, the managing director for housing and commercial research for the National Association of Realtors.

“On net, the impact will be a positive one for commercial real estate,” Ratiu said during a telephone interview this week.

Costello said uncertainty over tax reform likely kept some investors on the sidelines in the fourth quarter of last year.

“There was not the typical surge in activity seen in a year-end,” Costello said. “Given that the [new tax] rules were still being written on the margin of pages by hand into December, it was not easy for investors to figure out where things were headed. You cannot play the game if you do not know the rules, and the uncertainty likely limited activity for a bit.” 


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