Commercial Real Estate Market Outlook

Real Capital Analytics (“RCA”) recorded $122 billion of transactions in the fourth quarter of 2017, 13% lower than the fourth quarter of 2016. Overall transactional activity was down for all major property sectors for the quarter though for the year transactional activity was down a more modest 7%, aided primarily by 20% year over year increase in industrial property sales. According to CBRE Econometric Advisors (“CBRE-EA”) and as detailed below, vacancy rates for each major property sector increased during the fourth quarter, though the change for industrial, office, and industrial was only 10 basis points or less.

Multifamily – At the end of the fourth quarter of 2017, the national vacancy rate for multifamily properties was 4.9%, up 30 basis points from the prior quarter. Vacancy was 10 basis points higher than the rate from one year ago, representing the seventh consecutive year-over-year increase.

Fourth quarter 2017 sale volume for multifamily properties totaled $43.6 billion, down 7% from the same period last year. Transactional volume was slowed by a 20% decrease in mid and high-rise sales offset by transactional volume for garden apartments, which increased by 1%. In the fourth quarter, cap rates for multifamily sales averaged 5.6%, up 10 basis points from the prior quarter.

Retail – The national retail vacancy rate was up slightly during the fourth quarter at 9.6%. Store closings are expected to continue for many formats impacted by trends in e-commerce.

The retail sector recorded $14.9 billion in sales in the fourth quarter 2017, down 21% from the fourth quarter 2016. Retail transaction volume was impacted by a large drop in all sub-sectors. Grocery-anchored centers maintain a level of relative strength, with overall volume down only 8% for the quarter.

Average cap rates for retail properties were 6.6% in the fourth quarter of 2017, up approximately 10 basis points from the prior quarter.

Office – As of December 31, 2017, the national office vacancy level was 13.0%, up 10 basis points from third quarter 2017, including vacancy increases in both downtown and suburban markets.

Office property sale volume was $36.2 billion in the fourth quarter 2017, down 14% from the fourth quarter 2016. Transactional volume was down in both CBD and suburban markets, and both major and secondary markets. Average cap rates for office transactions were 6.7% in the fourth quarter, essentially unchanged from the prior quarter. CBD cap rates were unchanged at 5.6% while suburban rates were up 10 basis points at 7.0%.

Industrial – The national industrial vacancy increased slightly in the fourth quarter to 7.4% though remains effectively unchanged from a year ago. The outlook for this product type remains strong, with supply and demand generally in balance.

Sales of industrial property totaled $17.0 billion in the fourth quarter, down 5% from the same period last year. Single asset sales continued to show strength in this sector with a 5% increase for the quarter, offset by a 26% decrease in portfolio sales. Average cap rates for the industrial sector were unchanged for the quarter at 6.7%.


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