IRVINE, Calif. and SILICON VALLEY, Calif., Nov. 30, 2016 /PRNewswire/ -- Ten-X, the nation's leading online real estate transaction marketplace, today released its latest Commercial Real Estate Capital Trends report, which reveals that capital markets saw a modest increase in Q3 2016, following two consecutive quarters of decline. Overall transaction volume jumped 2.1 percent from the year's second quarter to $111 billion, driven largely by increases in the hotel and apartment sectors. Volume has now topped $100 billion during each of the last nine quarters, and Ten-X research shows the market remains relatively healthy in the face of both global and domestic economic uncertainty.
Apart from a flood of deals sent that sent volume soaring during late-2015, the overall market appears to have plateaued since 2014, evidenced by a 0.3 percent year-over-year decline in deals during Q3. Several factors, however, including surging wages and the market's continued ability to attract high levels of foreign investment help it remain promising for investors.
"While widespread volatility in the wake of Brexit and the uncertainty surrounding the U.S. presidential election have hampered many major markets across the world, the domestic commercial real estate market has remained the picture of resilience," said Ten-X Research Chief Economist Peter Muoio. "Property prices continue their steady climb while interest rates appear poised to remain historically low, making the market a relatively safe haven for investors looking for shelter from swirling global headwinds."
CRE Transaction Volume Rises in Q3
The aforementioned increase in deal volume from Q2 to Q3 marks the first uptick in the market in 2016. Transactions have consistently topped $100 billion since 2014 – an indication of strong confidence from investors – though they are hovering nearly 10 percent lower than their pre-recession peak, and a late-2015 spike in volume remains the only outlier in what has essentially been two years of flat growth.
Each of the five market sectors outperformed their 10-year total dollar volume averages during the quarter. Apartment volume led the way by outperforming its average by more than 70 percent, as consistently rising rents continue to buoy overall confidence in the sector. Office, retail and industrial each topped their 10-year averages by better than 30 percent. Hotels, meanwhile, bested its 10-year average by a mere 5.6 percent during Q3.
The multifamily sector was responsible for 33.2 percent of transactional volume in Q3, a rate well above its 10-year average for overall market share.
High levels of liquidity and continued yield chasing by investors helped drive an acceleration in property price growth during Q3. As of October, overall pricing had risen 7.8 percent compared to the same period last year, according to Moody's/RCA Commercial Property Price Index. After a slow start to the year, the Ten-X All Property Nowcast, which gauges national pricing through a combination of proprietary and third-party data, has now risen for eight straight months, including a healthy 1 percent increase in October. The streak of growth – the strongest the market has seen since early 2015 - has boosted year-over-year pricing growth to 6.9 percent, and pushed the All Property Nowcast to an all-time high.
The Ten-X Hotel Nowcast was the only sector that saw prices contract during October, continuing its period of outright decline. Pricing for hotels declined 0.3 percent during the month and has fallen more than 8 percent since the third quarter of 2015. Annual growth measured just 1.4 percent during the third quarter – its lowest level since the recovery began. The combination of a healthy supply pipeline and increased competition from Airbnb and other online-based companies provide little reason for optimism in the sector's near-term future.
Similar dynamics – including the rise of Amazon and other e-commerce companies – continue to afflict the retail market by driving customers away from traditional spaces. Ten-X's Retail Nowcast showed the sector is experiencing tepid growth with year-over-year pricing growth decelerating to just 6.5 percent.
Apartment pricing continues to lead all sectors in growth, measuring 13.5 percent year-over-year, according to the Ten-X Apartment Nowcast. The market continues to experience stellar growth driven by a combination of increased urbanization, low inventory and rising home prices that are young people are spurning in favor of renting. Pricing across the sector is now 50.3 percent higher than its prior cyclical peak.
The Industrial Nowcast has shown strong gains in recent months, capitalizing on the demand for distribution hubs and warehouse spaces needed to accommodate the rise of the e-commerce industry. Declines during 2Q, however, kept its annual growth constrained to 12.7 percent. The CPPI, meanwhile, measured its year-over-year pricing increase at 8.3 percent, trailing only the burgeoning apartment sector.
After a slow start to 2016, pricing in the office sector has rebounded in recent months, pushing year-over-year pricing growth to a healthy 13.8 percent, according to the Ten-X Office Nowcast. Though its progress has been slower than that of apartment or industrial, pricing now stands 15.8 percent higher than its prior cyclical peak, and CPPI readings now measure all three sectors as being at an all-time peak.
Ten-X Nowcast CRE Pricing Trends
Hotel the Only Sector to See Risk Premium Increase
As the 10-year Treasury rate remained relatively flat at 1.63 percent, risk premiums across the industry mostly reverted to their Q1 rates. The exception is the hotel sector, which rose 10 bps from last quarter, reacting to both cyclical and fundamental challenges that face the hospitality industry as a whole. Ten-X Research notes that this is the fifth consecutive quarter in which hotel saw an uptick in risk premiums, which are now up 60 bps from one year ago.
During the quarter, risk premiums in the office, industrial, and apartment sectors contracted by 20 bps, 30 bps, and 40 bps, respectively, while the retail risk premiums remained unchanged. But Ten-X Research suggests that investors keep a close eye on growth in the U.S. economy and wages, which might trigger a rise in Treasury rates in the near future.
Cap Rates Continue to Fall in Four of Five Sectors
Third quarter cap rate trends echoed those of risk premiums, with the hotel vertical emerging as an outlier. The sector's cap rate rose by 5 bps, reaching its 10-year average of roughly 8.5 percent. But for each of the other sectors, cap rates trail their averages significantly, representing cyclical lows for each. The industrial and apartment sectors are particularly striking, sitting 100 bps and 90 bps below their averages, respectively. Office and retail, meanwhile, trail their averages by 70 bps and 60 bps, respectively.
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 260,000+ residential and commercial properties totaling more than $43 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 CapitalG (formerly Google Capital) and Stone Point Capital. For more information, visit Ten-X.com.