Deal volume in large capitalization markets has been declining for the past five quarters, as investors approached capital deployment more cautiously against steep price appreciation and the promise of rising interest rates. The issue was on display during the first quarter of this year, with sales volume totaling $94.8 billion, an 18 percent year-over-year decline, according to Real Capital Analytics (RCA).

In comparison, small cap markets posted a year of solid gains during 2016. However, the first quarter of 2017 brought a change in the trend line, with sales volume declining 4.4 percent, according to data from a survey of REALTORS® engaged in commercial real estate transactions. In addition, a smaller percentage of REALTORS® reported closing transactions—61.0 percent in the first quarter, compared with 69.0 percent the prior quarter—a sign of slowing activity. The trend was also mirrored in a smaller average transaction value for the quarter—$876,500.

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While investment volume declined, with tight inventories, prices in large cap markets appreciated. Based on Moody’s/RCA Commercial Property Price Index data, prices gained 7.0 percent during the first quarter. The gain came from strong appreciation in prices of apartment and office, which advanced 10.0 percent and 9.0 percent, respectively.  Prices for industrial properties increased 8 percent year-over-year, while retail properties recorded a 1.0 percent decline.

In comparison to top-tier markets, price growth also increased in small cap markets during the first quarter of 2017, based on REALTORS®’ information. Prices for commercial properties increased 7.2 percent compared with the first quarter of 2016. However, capitalization rates changes indicated a likely shift in investor risk preferences. Average national cap rates reached 7.5 percent in the first quarter, 30 basis points higher than the same period in 2016.

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