Commercial real estate deals and prices of properties that are typically less than $2.5 million are still rising though at a modest pace, according to NAR’s 2019 Q2 Commercial Real Estate Market Trends & Outlook Report. In 2019 Q2, REALTORS® reported a modest 2% annual sales volume growth and 1% annual price appreciation. Commercial property prices have been appreciating at a slower pace since 2018 as sales volume growth has also decelerated since 2016.
Multi-family and Industrial: strongest asset classes
Most of the sales transaction activity is in the industrial and multifamily assets, using as an indicator the diffusion index of sales growth across property types. A value greater than 50 indicates that more respondents reported an increase in sales in 2019 Q2 compared to one year ago than a decrease; the higher the index, the more widespread is the growth across geographic areas. Deals for office and retail strip centers were only slightly up from one year, while retail mall deals in 2019 Q2 were below year-ago levels in many areas, indicated by index values of below 50.
Cap Rates Slightly Up
Even as respondents reported a modest uptick in price, they also reported a modest uptick in cap rates, which indicate that the deals that went through involved higher net operating incomes on average. In 2019 Q2, the average going-in cap rates among survey respondents rose slightly to 6.9 percent, with higher cap rates for all asset classes. Cap rates for properties at $2.5 million and below were in line with the 6.8 percent cap rate in the $2.5+M market reported by Real Capital Analytics. The apartment asset class had the lowest cap rate at 6.2 percent, followed by industrial warehouse at 6.8 percent.
Construction Activity Tapers
One reason for the decline in sales activity is the decline in construction/development activity. Respondents reported on average that construction increased on average by about 4% in 2019 Q2 from one year ago. The pace of construction activity peaked in 2016 and has tapered since then. Respondents reported rising construction cost as one reason for the slowdown in commercial construction. Another factor that is constraining construction activity is the difficulty of finding construction workers. During April, May, and June 2019, there were fewer payroll workers in the construction of commercial buildings (“non-residential construction” in Bureau of Labor Statistics terminology) compared to one year ago.
Positive Outlook for Multi-family and Industrial Assets
Multi-family and industrial will continue to be strong commercial asset classes. The multi-family market is expected to remain bright in metros with low vacancy rates and affordable rents. E-commerce will continue to sustain demand for industrial properties, particularly flex properties. Retail brick and mortar will continue to do well in growing metros and in retail niches that require face-to-face customer service. The office market will be sustained by the growth in technology-driven jobs. The Opportunity Zone tax break on capital gains is expected to bolster commercial and residential real estate sales in 2019-2020.
By: Scholastica (Gay) Cororaton (NAR)
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