Single-Asset Sales Pick Up in the First Quarter

investment sales trend

Investment sales volume lagged in the first quarter, possibly as a result of investors’ concerns over the cost of financing.

Data from research firm CoStar indicates that investment sales dropped 10 percent year-over-year—or about $13 billion—continuing a trend from 2017. Experts had already anticipated that the first quarter might be slow. Compared to the fourth quarter, sales volume dropped 26.0 percent. The fourth quarter is typically the strongest for investment sales.

Investment sales data from another research firm, Real Capital Analytics (RCA), shows that sales volume rose nationwide by 5.0 percent year-over-year. RCA tracks sales valued at $2.5 million and higher; CoStar tracks all property sales.

Despite the discrepancy between the two firms’ statistics, the data shows that total sales clocked in at around $115 billion. For RCA, the total figure was $114.3 billion in the first quarter. For CoStar, sales totaled $115.7 billion.

“Although the first quarter has historically been one of the slowest, transaction volume peaked in 2015 and has been declining every year since. Uncertainty around the tax plan in December had some impact, while rising interest rates have increased borrowing costs, impacting deal flow,” wrote Justin Bakst, director of capital markets at CoStar, in an email.

In 2017, there was uncertainty following the U.S. presidential election and a pop in interest rates that contributed to a weaker first quarter. Uncertainty related to additional interest rate hikes and increased costs of financing likely have underpinned a similar slow start to 2018, says Peter Muoio, chief economist at Ten-X, an online real estate platform. “There’s been a decided move-up of the 10-year Treasury, and that’s really putting pressure on cap rates as well,” he says.

The rise in interest rates is contributing to an increased investor focus on non-core assets and secondary markets, which can provide more opportunities for yield, according to a first-quarter report from consulting firm PwC on U.S. real estate deals. The report found that for January and February, the number of deals rose by 2.0 percent year-over-year, but total deal volume declined by 1.0 percent, totaling $61 billion.

Overall, the investment sales environment was “stable,” in the first quarter, according to PwC. “This stability is an outcome of the amount of capital available and the emergence of new market participants both domestically and internationally,” the report states.

Other experts also say the uncertainty of last year’s stalled environment is lifting.

Jim Costello, senior vice president at RCA, says his firm’s figure of a 5.0 percent increase in sales volume reverses a trend of five straight months of decline. RCA’s data also shows that there are more single-asset transactions as opposed to large portfolio sales. “It’s much more of a vote of confidence,” Costello says.

The bid-ask gap between buyers’ and sellers’ expectations also appears to be shrinking, he adds. For example, Costello notes that RCA’s price index showed that prices have started to drop slightly—by 1.9 percent—in Manhattan, reflecting sellers being more willing to bring assets to market again.

Michael Weiser, president of GFI Realty Services, a New York-based real estate investment firm that focuses on multifamily and mixed-use properties in the New York region, says the first quarter of the year was a strong one for his firm. Last year, GFI closed roughly half the sales transactions it in 2016. After the first quarter of 2018, the firm has around $200 million in closed deals, on track to reach its typical $800 million annual total.

For Weiser, the bid-ask spread “has definitely narrowed.” Uncertainty in the market last year has also eased, he says. For example, the recent infusion of Chinese capital, which was driving up prices, has slowed, as Chinese firms look to sell major U.S. assets, he notes. “The bottom line—we understand capital is going to flow again,” he says.

Uncertainty related to tax reform has also lifted, at least for the medium term: “I think that’s allowed people to suddenly say, ‘Let’s transact again,’” Weiser says. Investors also know that interest rates have risen and expect that they will likely rise further, he adds.

As for pricing, Newport Beach, Calif.-based research firm Green Street Advisors projects that commercial real estate property values will trend downward this year. The Ten-X NowCast, its pricing index, reflected a gain of 0.1 percent in April. This marked a third straight a month of pricing growth, but the first time in the index’s history of a year-over-year drop. Meanwhile, RCA’s Commercial Property Pricing Index (CPPI) was more optimistic, reflecting an 8.5 year-over-year price increase from the year before.

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