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Commercial property sales will beat 2017 totals

Commercial real estate deal volume in 2018 should easily surpass the 2017 total, but fall far short of the peak of the market in 2015.

The outlook for 2019 is a bit more uncertain, according to the tracking company Real Capital Analytics (RCA).

commercsalesSales of commercial properties stood at $394 billion year to date through September, up 11 percent compared to the $356 billion total through the first three quarters in 2017, RCA said. The company tracks sales that exceed $2.5 million.

“It would be very difficult at this point for deal volume in 2018 to be below 2017,” said RCA Senior Vice President Jim Costello during an interview on Tuesday. “Even for it to be on par, you would have to have a dreadful Q4.”

The 2018 transaction volume will run below 2015’s record of $569 billion, however.  

“We had a period of time where interest rates were falling and cap rates were falling,” Costello said. “Because of that, both prices and deal volume grew at double digits. It was a screaming buy opportunity to be in commercial real estate. There are still opportunities, just not as compelling as it had been a few years earlier.”

Costello said 2019 deal volume will likely depend on how high interest rates rise. Cap rates have stayed near their historic lows over the past year in most of the asset classes, despite an uptick in rates, reflecting high and rising sales prices. RCA’s all-property price index gained 7.2 percent in the year through the third quarter. Should rates rise more, buyers may back off in 2019.

“What it might do is move buyers and sellers a little bit further apart than they are even now,” Costello said. “It may make deal volume slow a little bit further in the coming year.”

Global turbulence and a strong U.S. dollar also have clouded the outlook for 2019. The strong dollar is making it harder for foreign investors to buy U.S. properties, but is also drawing more interest in the U.S.

“A strong currency is a sign of a strong economy,” Costello said. “So, there are things that are happening here that aren’t happening elsewhere in the developed world. That is generating some additional demand. Some of it can’t be realized because the costs are too much.”

The deal volume in the third quarter was primarily driven by a record level of entity deals, where a company purchases another company and assumes its portfolio of assets. These mega-deals totaled $29.3 billion in the quarter, far surpassing the previous record for entity-level deals of $17 billion in the third quarter of 2017, RCA reported. The biggest of the entity-level deals saw Toronto-based Brookfield Asset Management complete a $15 billion deal to buy all of GGP Inc., the second largest U.S. mall owner, according to Bloomberg News. RCA said that 175 properties changed hands in the deal. 

Overall sales in the third quarter totaled $152.7 billion, up 17 percent compared to the third quarter of 2017. Costello said single-asset sales, which are the surest indicator of how the market is doing, are also up compared to 2017, particularly outside the six largest U.S. markets. 


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