Report: US Commercial RE Investments Down 12% Despite Market Being ‘Awash in Capital’

The sector continues to attract foreign investors, led by the Canadians, as well as Asian buyers, Avison Young says.

Abundant capital is flowing into the commercial real estate space, according to Avison Young, with lack of product for sale pushing up prices and causing some investors to expand their investment horizons, taking on more risk.

“The commercial real estate sector remains awash in capital; and despite varying global economic, political, and property market conditions, including the ongoing interest-rate scenario, there is no better place to put your money than in hard assets,” said Mark E. Rose, CEO of Avison Young. “In short, real estate has established itself as a real alternative asset class to stocks and bonds.”

The Toronto-based commercial real estate services firm reports in its fall 2017 commercial real estate investment review, covering activity in the first half of the year in North America and Europe, that the US saw a 12% drop off in activity in the first half of 2017, compared to the 2016’s first half, with investments down in 21 of 40 markets. Investors were interested in multifamily and office properties, and the industrial sector attracted more investment capital compared to the first half of 2016.

Foreign investors continue to be interested in US commercial real estate properties, with Canadian investors ahead of others, having overtaken the Chinese. Investment from other Asian countries such as Japan, Singapore, and Hong Kong went up.

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“A 12% year-over-year reduction in transaction volumes is significant, and it illustrates the disconnect between seller expectations and buyer underwriting occurring in many markets across the US,” noted Earl Webb, Avison Young’s president, US operations. “This disconnect is somewhat in conflict with the broad improvement in market fundamentals that the US continues to register.”

He added that there is still strong competition for “institutional-quality assets” that is pushing up values. In fact, 16 of 40 US markets that Avison Young serves saw sales volume of higher than $3 billion, with Los Angeles and New York leading the list. San Francisco saw the highest rise in investment sales activity, which was up 73% compared to 2016. 

Cap rates for all property types across all markets in the US were flat at 6.5%, compared to 2016, considering that there was a rise in retail cap rates that offset a slight decline in cap rates for office, multifamily, and industrial properties.

In Canada, there was a year-over-year rise in investment sales in the first half, with dollar volumes higher in five of six markets in the survey. While most of this capital was attracted to the office sector, the retail sector saw the highest increase from the 2016 period.

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