IRVINE and SILICON VALLEY, Calif., June 28, 2016 /PRNewswire/ -- Ten-X, the nation's leading online real estate transaction marketplace, today released its Q1 2016 Commercial Real Estate (CRE) Capital Trends report, which reveals that transaction volume for CRE capital markets decreased significantly in Q1, after reaching its cyclical peak in the previous quarter. The total deal volume for the five major CRE sectors fell to $108 billion, representing a decline of 18.5 -percent from one year prior. However, the report states that despite the cyclical valley in deal flow, real estate fundamentals continue to improve, highlighted by a flourishing industrial sector.
CRE Deal Volume; Sources: RC Analytics, Ten-X Research
Ten-X Nowcast CRE Pricing Trends; Sources: Ten-X Research
CRE Risk Premiums; Sources: RC Analytics, Department of the Treasury, Ten-X Research
CRE Cap Rates
"A first quarter slowdown in transactional volume was predictable, as investors traditionally push to get deals on the books by the end of the fourth quarter," explained Ten-X Research Chief Economist Peter Muoio. "While these figures indeed show a near-33-percent drop-off in from the previous quarter, it's important to note that, adjusted for seasonality, current deal flow has recovered to within 8.3 percent of pre-recession highs."
Although deal flow – across the office, industrial, retail, multifamily and hotel sectors – fell 32.7 percent from its Q4 peak, total transactional volume still broke the $100 billion threshold for the seventh consecutive quarter. Still, each sector hovered below its 10-year average in terms of deal volume, with the exception of the multifamily segment, whose 36.4 percent share of the quarter's transactions exceeded its 10-year average by 950 bps. This seemingly lopsided share of transactions suggests that, despite rising apartment vacancies, investors remain optimistic about the prospects for the sector, according to Ten-X Research.
Overall, each sector, save hotel, is outperforming its 10-year average for overall transactional volume. Retail and multifamily are the clearest outliers, outpacing their 10-year averages by 33.2 percent and 89 percent, respectively.
Despite declining in two of the past four months, overall property pricing in April was up 5.4 percent compared to one year prior, per Ten-X's report. Retail and multifamily are leading the way in terms of pricing growth, boasting yearly gains of 9.5 percent and 11.3 percent respectively. And according to Ten-X's recently released All Property Nowcast, which gauges national pricing through a combination of proprietary and third-party data, overall property valuations are up 5.8 percent year-over-year.
Ten-X's research suggests a recent slowdown in the industrial sector, as the Industrial Nowcast pointed to a modest 0.7-percent drop in valuations in May. But the research is quick to note that the slight decrease is to be expected following a torrid year of industrial activity in which Nowcast valuations, bolstered by e-retailers' needs for distribution space, grew a total of 14.6 percent.
As the 10-year U.S. Treasury rate – commonly the base measurement for "risk-free" investments – dropped to 1.89 percent from 2.24 percent in the prior quarter, risk premiums in Q1 increased across each of the five CRE sectors. The report notes several variations among the increases, including the industrial segment, which increased 120 bps to 5.6 percent, a number that is likely to inch downward in subsequent quarters as deal flow reverts to normal levels. The hotel sector continued to post the highest risk premiums of any sector, increasing to 6.6 percent.
In all cases, risk premiums are now higher than they were one year ago, save the apartment sector, which saw only a modest increase in Q1. Ten-X Research points out that Treasury rates are likely to remain flat in the near term, due largely to concerns about job growth, oil prices, and volatility in the global economy, which will likely relieve upward pressure on cap rates.
Sources: RC Analytics, Department of the Treasury, Ten-X Research
CRE Cap Rate Fluctuation
Despite the drop in U.S. Treasury rates, cap rates saw only modest declines in the office, multifamily, and hotel sectors. Meanwhile, industrial cap rates rose from their cyclical low to 7.3 percent, an increase of 70 bps, while retail rates increased by 10 bps. Still, all sectors are hovering below their 10-year averages, with the exception of hotel, which matched its 8.5 percent Q1 average. The greatest separation lies in the apartment segment, which is 70 bps lower than its 10-year average, the largest gap seen through the post-recession recovery.
"It's clear that, overall, the industrial sector has fared particularly well in recent quarters, and is poised for additional growth in the near future," added Muoio. "And although we're seeing slight seasonal fluctuations in segment-specific valuation attributes, the longer term trends we're seeing in CRE continue to point toward a recovery to pre-recession levels."
About Ten-X
Ten-X is the nation's leading online real estate transaction marketplace and the parent to Ten-X Homes, Ten-X Commercial and Auction.com. To date, the company has sold 200,000+ residential and commercial properties totaling nearly $39 billion. Leveraging desktop and mobile technology, Ten-X allows people to safely and easily complete real estate transactions online. Ten-X is headquartered in Irvine and Silicon Valley, Calif., and has offices in key markets nationwide. Investors in the company include Google Capital and Stone Point Capital. For more information, visit Ten-X.com.
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