Rising Interest Rates, Bid/Ask Gap Lead to Tempered Growth in Investment Sales in First Half of 2018 August 20, 2018

National Real Estate Investor | August 1, 2018

By Mary Diduch

Amid uncertainties related to rising interest rates, the over-extended real estate cycle and a lingering bid/ask gap, investment sales volume remained steady in the first six months of the year, while one property sector—hotels—posted a standout performance.

Research firm Real Capital Analytics (RCA) reported in its latest U.S. Capital Trends study that deal volume totaled just over $236 billion—a 4.0 percent increase year-over-year—in the first six months of 2018. For the second quarter alone, there was a 2.0 percent year-over-year gain in deal volume, which totaled $118.8 billion.

This is slightly ahead of the pace seen in 2017, though much of the activity in the first half of the year was driven by big portfolio deals, a trend likely to continue in the third quarter, notes Jim Costello, senior vice president at RCA, which tracks sales valued at over $2.5 million.

Year-to-date single-asset sales rose by 2.0 percent year-over-year, compared to an increase of 10.0 percent for portfolio deals; in the second quarter, single-asset sales plunged 5.0 percent year-over-year, though mega-deal activity soared by 26 percent.

The overall level of activity bodes well for the industry, says Costello. “Just a short while ago, we had a steady drumbeat of deal volume falling every quarter,” he adds. “And in some cases, when you look at some individual property types, it really was a big quarter.”

According to the research firm CoStar Group, the first half of 2018 saw about $270 billion worth of investment sales transactions, a 2.0 percent decrease year-over-year. However, this figure is likely to change as more data from June sales rolls in, and might end up being nearly flat with last year, says Jack Mulcahy, credit risk analyst at CoStar. “Surprises aren’t usually welcome this late in the cycle,” he says. “It’s kind of reassuring 2018 is looking like 2017.”

Chris Ludeman, global president of capital markets at real estate services firm CBRE, says while the numbers may be off from the peak seen in 2015, there were no significant surprises in deal volume in the first part of the year. “If you look at it on average, they’re still at levels [that are] historically strong and sound,” he says.

RCA’s  commercial property price index (CPPI) was up 6.5 percent year-over-year in the second quarter, and cap rates on transactions involving all properties averaged 6.4 percent—a 13 basis-point increase from the same period in 2017. The price index tracked by Ten-X, an online real estate platform, marked a slight year-over-year increase, of just 0.3 percent, in July. This broke a three-month streak of year-over-year declines. At the start of July, research firm Green Street Advisors reported that its CPPI was flat in June, with pricing at year-end 2016 levels.

Some industry experts say the level of deal activity, while not floundering by any measure, still falls short of expectations.

“We started off thinking that 2018 would be stronger and certainly with the stats as they exist today, we’re relatively flat,” says Michael Weiser, president of GFI Realty Services, a New York-based brokerage firm.


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