CRE Trends: Property Prices Up, Cap Rates Down Across All Five Sectors
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The US economy is looking good at the moment, with the commercial real estate market and labor market remaining strong, while consumer spending and consumer confidence is up and the low interest rate environment continues to encourage CRE investments.
In a recent report, Ten-X Research outlined several commercial real estate trends the market has seen the first half of the year, particularly focusing on deal volume, cap rates and property prices. Check out how these trends are impacting the industry.
Overall property prices are up in all sectors as investors continue to chase high yields. Prices are up 8.4% as of June compared to the previous year, according to Moody's/RCA Commercial Property Price Index (CPPI).
The apartment and retail sectors reveal the strongerst price growth, prices jumping by 14.3% and 8.9%, according to the CPPI. Industrial and office follow closely behind with8.2% and 3.8% in price growth. Hotel remained steady with the previous quarter, though prices jumped 9.2% compared to the year-ago quarter.
Within four of the five segments, cap rates declined in Q2—office being the only sector that saw a modest increase, rising to 6.6%.
Retail and apartment cap rates reached new cyclical lows, dropping to 6.4% and 5.6% compared to the previous quarter. Though industrial cap rates spiked in the beginning of the year, according to Ten-X, the sector's rates fell 40 bps in Q2, and the hotel sector's rates fell by 30 bps.
As a whole, the 10-Year US Treasury rate decreased by 1.64% in Q2, due to a plethora of domestic and international influences such as the influx of investors turning to US real estate following Brexit.
Commercial real estate risk premiums increased in three sectors from Q1 to Q2, though it declined in the industrial and hotel segments.
Risk premiums—or the yield that corresponds to the risk investors receive when investing in a certain sector—rose in Q2 in office, retail and apartment sectors, rising by 30, 20 and 10 bps, respectively. Hotel dropped 10 bps, followed by industrial's 15 bps.
Ten-X says risk premiums are higher than they were a year ago in every sector, which can act as a buffer for high interest rates and cap rates.
Transaction volume across the five asset classes declined in Q2, continuing a downward trajectory.
Last quarter alone deal volume dropped 7.4%, according to data from Real Capital Analytics—that’s the lowest quarterly total in two years. Despite the cooling in CRE markets, transaction volume still amounted to more than $100B, a sign of continued confidence in US real estate despite global volatility.