Chris Paszyc, CCIM, SIOR / February 14, 2019
Despite a rising interest rate environment, investment in national commercial real estate year-to-date was $394.2 billion, up 10.6% from a year ago. For context, 2015 had the largest volume of transaction activity—$569 billion—since the 2009 bottom ($69 billion). 2017 was slower ($487 billion) than 2016 ($511 billion) due to fewer properties available for sale.
In this current cycle, buyers are holding their assets longer, because they’re having a difficult time finding prudent ways to invest sale proceeds, choosing instead to take advantage of the attractive lending markets to refinance. However, given the amount of money earmarked for commercial real estate investment and new construction pricing, we expect this trend to shift in what is perceived to be the late innings of the current real estate cycle.
International buyers boosted overall US investment, accounting for 16% of total volume, up 55% yearover- year from 2017. Greater New York, Greater Los Angeles and the San Francisco Bay Area attracted the most investment in Q3, accounting for 24.5% of all acquisitions. The top-15 markets accounted for nearly 61.4% of total Q3 investment volume. Industrial, hotel, and multifamily cap rates decreased modestly year-over-year in Q3, while office and retail cap rates were essentially unchanged. Industrial cap rates remained lower than office for the fourth consecutive quarter, a new record.
Pricing for all property types except retail is at an alltime high, with slight deceleration in recent months. Increases in multifamily and office pricing continue to lead the national index, while industrial continues to have decelerating growth. However, it should be noted that industrial was the only sector class with positive gains in 2017.
Given rising interest rates, we’re seeing traditional banks and borrowers favoring shorter term deals. Fannie Mae, Freddie Mac, and Farmers Home Administration are still very active, and widely considered to be the best options for multifamily deals. Life companies are very active – as the yield curve flattens, long-term fixed rates are becoming more attractive. Commercial mortgage-backed securities are still active, however higher pricing and availability of other sources are impacting their market share. There is still plenty of institutional and private equity available, with large sums of unspent cash committed to invest in commercial real estate. Overall, commercial mortgage production year-to-date is slightly softer than in 2017, with combined CMBS and GSE lending down by 3%.
Provided we see steady to growing employment statistics and capital is available, we expect continued strong demand for investment property statewide. While interest rates have increased over 2018, cap rates were essentially unchanged in most markets and sectors. Large scale multifamily assets and single-tenanted buildings with “A” credit long-term leases continue to trade in the lowest cap rate
range. Similar to 2017, long-term fixed debt and historically low rates have been available for investors all year. There also continues to be a steady mix of out-of-state capital and local buyers demanding product throughout the State of Maine. Experts predict the rising interest rate environment will eventually impact
commercial real estate pricing, however we have yet to experience the shift.
The Boulos Company facilitated more than $225.4 million in transactions on behalf of clients in 2018. Nearly $73 million of that volume represents investment transactions. The office sector, alone, accounted for 47% of the total sale transaction volume at over $40 million.
The most challenging factor in 2018 continued to be finding enough investment product to satisfy demand. We expect robust activity into the first and second quarter of 2019 as several investment properties are coming to market to capitalize on late-cycle market dynamics.