CRE Pricing, Deal Flow Reflect Investor Hesitancy 'At This Stage In The Cycle'
National commercial real estate pricing dropped across all five core property sectors by a collective 0.3% in June. Experts have attributed the decline to a myriad of factors, including rising interest rates, the long length of this cycle and reigning uncertainty regarding the new administration’s policies and their impact on the industry.
“I do think that the pure length of the cycle is starting to have an impact on investors,” Ten-X Chief Economist Peter Muoio said. “I’m starting to hear more and more things like, ‘at this stage of the cycle we don’t think it is appropriate to be looking at X, or this is a more conservative bet.’ That phrase, ‘at this point in the cycle’ starts becoming an element in and of itself, having an [impact] on deal volume and pricing.”
This is the second consecutive month of CRE pricing declines, according to Ten-X’s monthly pricing index, which combines Google Trends data, proprietary transaction data and investor surveys to determine commercial real estate pricing trends in real time. In May, commercial pricing dropped nationwide by 0.1%.
Despite the two-month drop, commercial valuations remain at record highs. Commercial prices have been appreciating since the Great Recession; a Real Capital Analytics all-property index shows prices have risen 104% since 2010. June’s prices are 9.5% higher than national prices were in June 2016, Ten-X reports.
The Winners And The Losers
Considering the length of the cycle and the inflated state of property prices, investors are increasingly looking beyond core markets and premier assets for safety and solid returns, investing in alternative assets such as student housing and healthcare properties, several speakers said at Bisnow’s National Finance Summit in New York City late last month. AllianceBernstein co-head and Chief Investment Officer Brahm Cramer said many secondary and tertiary markets are catching investors’ eyes.
“Go spend some time in Nashville, Austin, Atlanta, Seattle [where] spec buildings are going up and before they’re finished, they’re getting pre-leased … To me, it’s about finding, within the U.S., in this rotation, who are the winners and the losers, and trying to get ahead of that train,” Cramer said.
Most commercial real estate players started the year confident in Trump's plan to institute business-friendly policies. Now, halfway through 2017 with little progress made in tax cuts, infrastructure spending and financial deregulation, some of that confidence has been replaced with trepidation regarding tax reform (particularly the elimination of the 1031 exchange program and the net interest deduction), trade and the continued probe into Trump’s Russian ties.
These concerns and the length of the cycle have led investors to take a wait-and-see approach in their dealmaking, which has exacerbated the slowdown in U.S. deal volume and drop-off in pricing growth.
The biggest winners in terms of commercial pricing gains in June fell within the multifamily and retail sectors. Apartment pricing rose modestly in June as investors continued to flock to the sector despite the large wave of supply scheduled to come online this year. Ten-X reports most of these pricing gains occurred in the Midwest markets where new supply is not heavily concentrated. Retail pricing jumped 0.9% in June, most of which was a correction from May’s sharp decline. Ten-X expects Amazon’s Whole Food’s acquisition will cause additional headwinds in this sector going forward, as concerns regarding e-commerce competition and the country’s overbuilt retail sector persist.
“It will be interesting to see what happens with retail next month. We’re getting all of this data over the course of the month, and there has been a lot of chatter about the Whole Foods-Amazon deal and what that means for retail,” Muoio said. "We’ll see if that has any sort of impact [on retail pricing] come July."