A new report from Real Capital Analytics shows that overall sale volume in the US commercial real estate market decreased significantly year-over-year (YOY) in the first half of 2016, while investors retreated from riskier asset types and regional markets.
“Deal activity is down overall, but institutional managers and equity funds have been actively expanding in H1 2016 while other investors reign in their acquisitions,” reads the report. “Underlying this story is a bit of a move away from riskier investments.”
Total sales volume the first half of this year hit $219.2 billion, down 16 percent in the first half of the year.
Rocky financial markets in Q1 2016 raised mortgage rates and “led to concern that cap rates might begin an upward creep,” which fueled anxiety that prices might follow, while the Brexit vote at the end of Q2 cast even more uncertainty in the market, according to the report.
Volume declined for REITs, private groups, as well as cross-border investors, by 64 percent, 7 percent, and 47 percent, respectively. Only institutional managers and equity groups saw transaction volume increases, up 11 percent during the same time period.
But even the institutional managers and equity funds decreased their volume of riskier, ‘value-add’ deals by 16 percent, while raising their volume of safe, core asset deals by 17 percent.
All investor groups moved away from hotel, development sites, and tertiary markets, the report also shows. Volumes from H1 2016 suggest that investors retreated from “laggards” like hotels and development sites because they have “more immediate exposure to any potential economic shocks.”
Hotel transactions only reached $12.7 billion, down 55 percent compared with the first half of 2015, while development site sales only hit $4 billion, dipping 22 percent.
Investors also shifted activity towards gateway cities in a “clear move away from tertiary markets,” which “are viewed as riskier markets from a liquidity perspective with fewer options on exit and the pullback likely reflects that move away from risk.” Deal volume for US tertiary markets dropped 12 percent the first half of 2016, and as expected the highest proportion of “megadeals” took place in the six largest cities.