Commercial Investment Real Estate July/August 2016 | Page 29

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.
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. “Th 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. Th 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
aft 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. Th e Stuyvesant Town-Peter
Cooper Village housing complex sold last fall
for more than $5.3 billion, and the landmark
Waldorf Astoria hotel also traded early last
year for $1.95 billion. “Th 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. Th e fact that
the market is showing more discipline is a
healthy sign that we have learned some les-
sons, he adds.
Choosy Investors
Th 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. Th 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.
Th 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 lift 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. “Th 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
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July | August | 2016
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