Commercial Real Estate Market Outlook

Real Capital Analytics (“RCA”) recorded $119 billion of transaction volume in the second quarter of 2018, 2% higher than the second quarter of 2017. Overall transactional volume increased 39% for retail and 17% for industrial, while decreasing by 7% for apartments and 17% for office. Retail volume was primarily driven by a large portfolio deal as retail volume would have otherwise fell by 15%. According to CBRE-EA and as detailed below, vacancy rates for all four major property sectors decreased during the second quarter.

Multifamily – At the end of the second quarter of 2018, the national vacancy rate for multifamily properties was 4.6%, down 40 basis points from the prior quarter and unchanged from the rate of one year ago. Vacancy levels in the primary coastal markets remain below national averages.

Second quarter 2018 sale volume for multifamily properties totaled $34.5 billion, down 7% from the same period last year. Transactional volume was driven by a 12% increase in mid and high-rise sales though was offset by a 15% decrease in transactional volume for garden apartments. In the second quarter, cap rates for multifamily sales averaged 5.5%, down 10 basis points from the prior quarter.

Retail – The national retail vacancy rate was down slightly during the second quarter at 9.3%. A delay in expected new completions, in part due to labor shortages, may have contributed to the drop in vacancy.

The retail sector recorded $20.7 billion in sales in the second quarter 2018, up 39% from the second quarter 2017. Retail transaction volume was impacted by a large portfolio transaction, with most of the volume growth concentrated in major metropolitan areas. Average cap rates for retail properties were 6.5% in the second quarter of 2018, unchanged from the prior quarter.

Office – As of June 30, 2018, the national office vacancy level was 13.0%, down 10 basis points from first quarter 2018. Vacancy levels fell in both suburban and downtown markets during the quarter.

Office property sale volume totaled $28.8 billion in the second quarter 2018, down 17% from the second quarter 2017. The drop in transactional volume was consistent throughout the sector, with double-digit percentage volume decreases in Central Business District (CBD) and suburban properties as well as major and secondary metropolitan areas. Average cap rates for office transactions were 6.7% in the second quarter, up 10 basis points from the prior quarter primarily due to cap rate increases for suburban office properties.

Industrial – The national industrial vacancy rate decreased slightly in the second quarter to 7.2%. The outlook for this product type remains strong, with supply and demand generally in balance.

Sales of industrial property totaled $18.2 billion in the second quarter, up 17% from the same period last year. Transactional volume growth was consistent for both flex and warehouse properties, with volume up 18% and 17%, respectively. Average cap rates for the industrial sector fell approximately 10 basis points for the quarter to 6.4%.

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