Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/700533
July | August | 2016 CCIM.com Investors pulled back early in the year as concerns fl ared due to volatility in the stock market, slowing growth in China, slumping oil prices, and widening spreads in com- mercial mortgage-backed securities. " ere is nothing that stalls the market more than a plummeting stock market," says Barbara Byrne Denham, an economist at Reis Inc. in New York City. e 1Q16 stock market gyra- tions created a ripple eff ect that showed up across the board in transaction activity and lending volume, she says. On a year-over-year basis, investment sales dropped 20 percent in 1Q16 to reach $111 billion, according to Real Capital Ana- lytics. Despite that dip, sales volume is still relatively high. Over the last 11 years, only two other fi rst-quarter periods had deal vol- ume that exceeded $100 billion. In addition, investors may have been due for a breather a er 2015's near record high sales reached $543.2 billion, according to RCA. In fact, last year's mega transaction vol- ume may prove diffi cult to match. A num- ber of large deals occurred in 2015 — both single-asset and portfolio deals — that helped boost the overall transaction level to its highest level since 2007. For example, in New York City. e Stuyvesant Town-Peter Cooper Village housing complex sold last fall Commercial real estate investment sales faltered coming out of the gate in 2016. Investment sales dipped noticeably in the fi rst quarter compared to the prior year. Yet a gentle tap on the brakes in what has been a stable recovery is not cause for alarm. Economists continue to forecast a favorable outlook for transaction volume, absorption, and rent growth through 2016. -100% 100% 300% '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 for more than $5.3 billion, and the landmark Waldorf Astoria hotel also traded early last year for $1.95 billion. " ere were a lot of big, well-known property sales and it is hard to come off of a year like that and think it will repeat," Denham says. But a sales decline is not necessarily bad news for the market, says Hugh F. Kelly, CRE, a professor of real estate at New York Univer- sity. It is a sign that the commercial real estate industry is not moving in the direction of speculative excess as described by Anthony Downs a decade ago in his book Niagara of Capital. "I don't think we are seeing a fl ow of money that is like a force of nature that can't be stopped," Kelly says. e fact that the market is showing more discipline is a healthy sign that we have learned some les- sons, he adds. Choosy Investors e latest Urban Land Institute Real Estate Consensus Forecast, released in April, pre- dicts continued economic expansion over the next three years, but at a somewhat slower pace than the prior two years. e forecast expects commercial property trans- action volume to decline over the next three years to $525 billion in 2016, $500 billion in 2017, and $475 billion in 2018. at deceleration is a natural part of a maturing market cycle that is more than six years into its recovery. "What we see hap- pening is that the market is slowing down in alignment with what is more sustainable transaction levels," says Ken Riggs, CCIM, CRE, MAI, executive managing director and president at Situs RERC in Houston. Going forward, transaction volume will fl atten out more over the next 12 months, because it is a more mature transaction market and more mature market related to price versus value, says Riggs. So, given the slower pace of transactions in the coming year, where is capital likely to move in the current climate? Investors are becoming more selective as they recog- nize it is not a case where a rising tide li s all boats, says Kelly. Some sectors, such as hotels and trophy offi ce assets are already at or near peak pricing and values. In addition, multifamily volumes have blown past where the peak was 10 years ago. " at is too much money fl owing into multifamily, and it has driven capitalization rates down to levels where it hardly makes sense," he says. However, investors still have plenty of options across sectors to buy core, core-plus, value-add, and opportunistic properties. For example, multifamily is likely to continue to be Year over Year Change (%) Real Capital Analytics