Commercial Real Estate Market Outlook

Real Capital Analytics (“RCA”) recorded $114 billion of transactions in the third quarter of 2017, 9% lower than the third quarter of 2016. Overall transaction volume was down 9% for this period though activity by the major property sectors was mixed. According to CBRE Econometric Advisors (“CBRE-EA”) and as detailed below, vacancy rates for the office and industrial sectors decreased during the third quarter, vacancy for the multifamily sector remained unchanged, and retail vacancy increased slightly during the quarter.

– At the end of the third quarter of 2017, the national vacancy rate for multifamily properties was 4.6%, unchanged from the prior quarter. Vacancy was 10 basis points higher than the rate from one year ago, representing the sixth consecutive year-over-year increase.

Third quarter 2017 sale volume for multifamily properties totaled $39.9 billion, up 5% from the same period last year. Transactional volume was driven by a 14% increase in mid and high-rise sales while transactional volume for garden apartments decreased by 2%. In the third quarter, cap rates for multifamily sales averaged 5.5%, down 10 basis points from the prior quarter

Retail – The national retail vacancy rate was up slightly during the third quarter at 10.2%. Recent store closings as announced for several retailers may have impacted this increase.

The retail sector recorded $13.3 billion in sales in the third quarter 2017, down 32% from the third quarter 2016. Retail transaction volume was impacted by a large drop in nearly all sub-sectors, as only single tenant retail showed volume growth for the quarter. Negative sentiment in this sector had been an ongoing challenge in underwriting transactions. Average cap rates for retail properties were 6.5% in the third quarter of 2017, essentially unchanged from the prior quarter.

– As of September 30, 2017, the national office vacancy level was 12.9%, down 10 basis points from second quarter 2017, including vacancy reductions in both downtown and suburban markets.

Office property sale volume was $28.7 billion in the third quarter 2017, down 18% from the third quarter 2016. Suburban office sales continued to demonstrate relative strength in the third quarter, up 4% in comparison to the prior year, offset by a 49% drop in CBD office sales during the same time frame, as investors remain cautious on higher prices (and lower returns) on CBD investments.

Average cap rates for office transactions were 6.6% in the third quarter, essentially unchanged from the prior quarter. CBD cap rates decreased 10 basis points to 5.7% while suburban rates were unchanged at 6.8%.

Industrial – The national industrial vacancy fell again in the third quarter after posting the first increase in nearly seven years in the first quarter. The vacancy rate fell by 10 basis points, to 7.7% in the third quarter primarily due to strong absorption.

Sales of industrial property totaled $20.4 billion in the third quarter, up 8% from the same period last year. Industrial recorded the largest year-over-year increase in sales volume of the four major property sectors. The increase in sales volume was primarily due to a 36% increase in warehouse sales, offset by a 5% increase in sales of flex properties. Average cap rates for the industrial sector were effectively unchanged for the quarter at 6.8%.


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