CRE Deals Significantly Down But No Reason To Panic … Yet.
Proposed changes to fiscal, tax and regulatory policies raise a host of questions that are influencing investors’ decisions. Over the first two months of 2017, early estimates place commercial real estate transactions down by 20 to 25 percent compared with the same period last year, according to a recent Marcus & Millichap report. This comes on the heels of an estimated 15 percent decline in the fourth quarter. Though the pause in activity is significant, it should be noted that sales last year were near record levels. As greater clarity on the range of economic, tax and fiscal policy changes emerges, investor activity will likely recover.
Window of opportunity
While some investors have stepped back from the market to assess the implications of potential policy changes, many buyers are seeking to capitalize on the reduced competition for assets. The outlook for continued economic momentum, including steady job creation and accelerating wage growth, remains a strong driver of asset performance. At the same time, restrained development in all but apartment properties will help the sector sustain positive fundamentals. Though interest rates have risen since the election, they remain low by historical standards, and many investors are locking in the current rates as the Federal Reserve has signaled steady monetary normalization over the course of the year.
Favorable metrics
Although transactional velocity has eased, pricing and yields have remained remarkably steady. Buyers looking for large discounts are facing sellers who are generally benefiting from elevated occupancies and a lack of distress. Limited development this cycle and balanced debt levels have helped sustain market equilibrium. Another key ingredient has been steady economic momentum that has offered a tailwind to space demand drivers for commercial real estate, pressuring vacancy rates. Apartment, retail and industrial properties achieved their tightest year-end vacancy level in 16 years, while office properties set a seven-year low, according to the Marcus & Millichap report.