Cries that a double-digit drop in first-quarter investment sales volume corresponds to an imminent market implosion are overblown, according to industry sources. The slowdown in activity was expected for some time, they claim.
First-quarter transaction volume totaled $94.8 billion, an 18 percent year-over-year decline, according to data from Real Capital Analytics (RCA), a New York City-based research firm. Portfolio deals fell by 38 percent year-over-year, while single-asset transactions fell by 10 percent.
Historically, however, transaction levels are a bit above average. Deal activity for the quarter was 41 percent higher than the average pace of sales tracked for first-quarter periods, RCA found.
First-quarter uncertainty regarding the direction of interest rates and the details of the promised tax reform caused buyers to pull back from acquisitions.
“Commercial real estate investors are operating in an environment of uncertainty in so many realms—there’s uncertainty regarding tax policy, regulatory policy, fiscal policy. Until you get clarity on where things are going, we should see muted activity continue into the second half,” says Jim Costello, senior vice president with RCA.
“We were not surprised by the slowdown in deal volume in the first quarter. The prospects for tax reform are higher than they’ve been for a long time and bring potential for uncertainty in property investment,” according to Dave Bragg, managing director at Green Street Advisors, a Newport Beach, Calif.-based research firm. Transaction volume in the next couple of quarters should remain consistent with first quarter performance, Bragg notes.
The most significant pullback in acquisitions came in the apartment sector, where deal volume fell 35 percent year-over-year, according to RCA. The report noted that “the positive run for transaction volume has simply run its course.” Industrial was the big winner, with sector activity growing 3 percent year-over-year. The numbers lend credence to reports of high demand seen in the sector over the last six months.
If interest rates continue to increase throughout 2017, single-asset deals may prove to be a safer harbor for investors, according to Costello.
RCA notes that investors should not expect cap rates on single-asset acquisitions to move up at the same pace with interest rates. “The forces driving interest rate increases should reduce the cash flow risks presented by the occupiers of single-tenant assets,” RCA researchers wrote in the report.