Commercial real estate investment trends were positive in 2014, following on last year’s tail winds. Sales of large CRE transactions (LCRE)—over $2.5M—advanced 21 percent year-over-year in, totaling $438 billion, based on Real Capital Analytics (RCA) data. Investor demand for properties continued on an upward path, as economic fundamentals, broadening lending sources and capital followed returns.
In the first quarter 2015 sales volume rose 45 percent on a yearly basis, totaling $129 billion, according to Real Capital Analytics. Office investments comprised $33.5 billion in sales, while apartments made up an additional $33.0 billion. The largest yearly gain was recorded by the industrial sector, where volume shot up 95 percent compared to the first quarter 2014.
While secondary and tertiary markets remained on the list of investor destination during 2014—due to higher yields—top markets returned to the forefront as capital sources consolidated in pursuit of top-tier properties. In comparison to the high-end deals, 86 percent of commercial REALTORS® posted transactions below the $2.5 million threshold in 2014. Although many REALTORS® participate in transactions above $2.5 million per deal, they serve a segment of the commercial real estate market for which data are generally not as widely reported, which we term the small CRE transactions (SCRE).
Based on National Association of REALTORS® (NAR) data for the SCRE market, sales volume increased 35 percent on a yearly basis in 2014. The strong increase mirrored the renewed investor interest in stabile market and properties offering higher yields. Prices for REALTORS® commercial transactions advanced 8 percent year-over-year in 2014, a much slower pace than in LCRE transactions. The data underscore an important point about the recovery and growth in SCRE markets. The rebound in smaller markets was delayed by three years and the rate of price growth has been shallower.
With rising asset valuations and prices, the incidence of failed transactions due to financing have been declining. According to the REALTORS® Commercial Lending Trends 2015 report, the proportion of failed sales deals falling through due to lack of financing was 42 percent. The figure compares positively with the past five years, when failure rates exceeded 50 percent, reaching a high of 67 percent in 2012. However, in light of the broadening recovery in commercial markets, the numbers paint a picture of a market in which investors continue to be negatively impacted by lack of capital or overly stringent underwriting standards.
The lending survey highlights the marked differences in the LCRE markets versus the SCRE markets. Debt financing represents a much-larger portion of capital in SCRE markets, whereas LCRE deals benefit from significant equity contributions.
In the case of failed transactions on account of lack of financing, 54 percent of REALTORS® cited loan underwriting standards as the main culprit, pointing to an increased scrutiny from banks following regulatory requirements. The other major reasons cited were appraisal/valuation and financing availability, each accounting for 17 percent and 16 percent of responses, respectively.
For more information and the full report, access NAR’s Commercial Lending Trends 2015.