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2005 Set New Record: $268 Billion in Deals

The numbers have been tallied and 2005 will officially enter the record books for breaking previous records for deal volume in commercial real estate.

According to data collected by Real Capital Analytics and released today, total sales for all property types exceeded $268.2 billion, smashing (by 44%) the previous record of $185.9 billion set in 2004. It is also more than double the $119 billion in transactions recorded in 2003, according to New York-based Real Capital, which tracks commercial real estate sales of $5 million and up.

"I call 2005 the year of large transactions and portfolio sales," says Hessam Nadji, managing director of research services at Marcus & Millichap Real Estate Investment Brokerage Co. Nadji's company tracks deals of $1 million or more in 37 metropolitan areas, and found a sale volume increase of 43% from 2004 to 2005.

The number of large transactions, or those valued at $20 million or more, increased 52% in 2005, with a 54% increase in dollar volume, according to Marcus & Millichap. "That's the primary reason overall volume went up," Nadji says.

Driving the volume of large deals are private investors and institutions. "Private investors are basically selling their smaller assets and consolidating to fewer, larger assets through 1031 exchanges," Nadji says. "On the flip side, a lot of institutional investors are reshaping their portfolios. They are disposing of whatever doesn't fit their long-term plans, leveraging the current record buyer demand and record pricing."

The field of buyers in 2005 ranged from the traditional - institutions and public real estate investment trusts - to private corporations, tenant-in-common groups, private REITs, foreign investors and hedge funds

“It gives the market a feeling of a cushion,” says Dan Fasulo, director of market analysis at Real Capital.

“What amazes me about this year’s total is the diversity of capital sources that have contributed to acquisitions,” says Fasulo.

“In the past, you might have had two or three dominant sources of capital to purchase real estate, but there are so many now. Even if one of these sources of capital fades away, there’s another behind it, ready to step up.”

In 2006, Fasulo expects to see yet another volume increase as even more capital sources expand their portfolios to include real estate. At the same time, several nations including Germany and Japan are in the process of adopting REIT legislation, which will open new avenues for foreign capital to acquire U.S. assets.

“The biggest wild card in 2006 will be whether more 401(k) plans allow for a REIT allocation,” says Fasulo. “That will mean direct inflows to REIT stocks, which will be good for REITs and in turn allow them to purchase more real estate”.

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