Based on the Expectations & Market Realities in Real Estate 2015: Scaling New Heights report—released by Situs, RERC, Deloitte and the National Association of REALTORS®—commercial real estate (CRE) has been riding a wave of improved macroeconomic conditions and bullish capital markets. CRE sales volume continued positively, with $438 billion in closed transactions during 2014, based on data from Real Capital Analytics (RCA). The first quarter 2015 continued the trend, with sales volume reaching $129 billion, a 45 percent year-over-year increase. Most of the transactions reported by RCA are based on data aggregated at the top end of the market—above $2.5 million.
In contrast to the large commercial transactions reported by RCA, commercial REALTORS® managed transactions averaging $1.6 million per deal , frequently located in secondary and tertiary markets (small CRE markets, or SCRE markets), and focused on small businesses and entrepreneurs. The Commercial Real Estate Lending Trends 2015 shines the spotlight on this significant segment of the economy—a segment which tends to be somewhat obscured by reports on large Class A commercial properties.
The data underscore an important point about the recovery and growth in SCRE markets. Based on comparisons of vacancies, rents, as well as sales, prices and cap rates, the rebound in smaller markets was delayed by three years and the rate of price growth has been shallower. Capital liquidity also recovered at a slower pace, as debt financing represents a much-larger portion of capital in SCRE markets, whereas LCRE deals benefit from significant equity contributions. Based on the 2015 report, the bulk of capital in SCRE markets flowed through regional and local/community banks, which accounted for 58 percent of transactions in 2014.
The raft of financial regulations which has hit the industry over the past six years has left a deeper impression on available capital for CRE deals. With higher costs of compliance and higher capital reserve requirements for CRE loans, regional and community banks have shouldered a proportionally larger share of the costs, leading to more cautious lending activity. In 2014, 22 percent of REALTORS® reported tightening lending conditions, compared with 28 percent in 2013.
While the figure points to an improving capital market the pace and volume remains slower than for LCRE markets. When asked if bank capital allocated to CRE projects remains an obstacle to sales, 58 percent of REALTORS® responded affirmatively. The top reasons cited for these difficulties were legislative and regulatory initiatives, uncertainty over regulatory actions.
For more information and the full report, access NAR’s Commercial Lending Trends 2015.