Commercial real estate finds itself at the intersection of major global changes. Activity has remained moderate in the world’s economies, with further monetary easing continuing on several continents, according to the Expectations & Market Realities in Real Estate 2017: Intersection of Global Change report, released by Deloitte, the National Association of REALTORS®, and Situs RERC.
Commercial real estate (CRE) investment trends mirror the global economic slowdown and broader uncertainty. Sales of global large capitalization (cap) transactions—over $2.5M—have been on a decline over the past two years, with 2016 volume totaling $826 billion (down 15%) and the 2017 first quarter’s volume at $271 billion (down 2%), based on data from Real Capital Analytics (RCA). Investors took a pause from the strong pace of investments recorded in 2015, ascertaining the impact of economic and geopolitical changes upon markets. Commercial investments in the U.S. echo the global trends, with sales volume in large cap markets closing the year at $489 billion, an 11 percent decline on a yearly basis.
In comparison to the high-end deals, 83 percent of REALTORS® who specialize in commercial investments reported transactions below the $2.0 million threshold in 2016. Although many REALTORS® participate in transactions above $2.0 million per deal, they serve a segment of the CRE market for which data are generally not as widely reported—small cap investments.
Based on National Association of REALTORS® (NAR) data, CRE in small cap markets continued on a divergent path, with sales volume accelerating during 2016. REALTORS® reported continued improvement in fundamentals and investment sales. Following on the first and second quarters’ above-8.0 percent advances in sales volume, and the third quarter’s 11.0 percent gain, the last quarter of the year witnessed sales volume rising 12.9 percent compared with the same period in 2015.
As domestic and international investors across the value spectrum broadened their search for yield into secondary and tertiary markets, the shortage of available inventory remained the number one concern for commercial REALTORS®. Prices for small cap commercial properties increased at an average of 5.9 percent during the year. The data underscore an important point about the recovery and growth in small cap markets. The rebound in smaller markets lagged by three years that of large cap markets, providing investors in these markets opportunities for continued growth.
However, even with continued improvement in leasing fundamentals and cash flows, overarching regulatory concerns led to a tightening of lending conditions in REALTORS®’ markets. In 2016, 37 percent of REALTORS® reported tightening lending conditions, compared with 33 percent in 2015, 22 percent in 2014 and 28 percent in 2013.
In addition, 51 percent of REALTORS® reported that insufficient bank capital remains an obstacle to commercial sales in small cap markets. Regulatory uncertainty for financial institutions was the main reason for the banks’ restrictive approach to commercial lending, followed by proposed legislative and regulatory initiatives.
Against this backdrop, the proportion of cash deals increased from 26 percent in 2015 to 30 percent in 2016, as it remained a significant component of small cap markets’ financing.
For the full report, access NAR’s Commercial Real Estate Lending Trends 2017.