CRE Sales Hit New 60-Day Peak

RCA headquarters in Midtown South; the firm acknowledges uneasiness in commercial real estate at present.

N EW YORK CITY—Stock market volatility or no stock market volatility, preliminary data from Real Capital Analytics suggest that January deal volume for US commercial property sales remained elevated at $44.5 billion. Although down 7% from the year-ago period, it still represents the second most active January on record—just as 2015′s 12-month tally of $533 billion was the second highest on record, behind 2007. Moreover, when January’s totals are combined with those of the preceding month, the tally of $117.2 billion is the highest for any 60-day period on record. “Global concerns have resulted in the worst start of any year in the broader financial market,” according to Jim Costello, SVP at New York City-based RCA. However, Costello wrote in a client note on Friday, commercial real estate trends appear resilient, even as pricing gains have begun slowing down. “Those equity market fears may provide lift for the most core commercial real estate as investors pile into low risk assets during volatile periods. Interest rates have unexpectedly fallen and the outlook for further movements by the Federal Reserve is limited.” In its most recent US Capital Trends report—another is due out this coming Wednesday—RCA offered some additional reflections on global uncertainty and what may or may not be causes for concern when it comes to commercial real estate performance. “At recent industry conferences there has been a persistent attitude that something bad may be coming in 2016 for commercial real estate, but nobody can quite say what it is,” according to the USCT report. “Think about it, how many times have you heard the question ‘what inning are we in’ at recent events?” The report itself poses a question: “Is something bad coming for commercial real estate in 2016 or are market participants simply too jittery and need to switch to decaf?” Given the continued growth in domestic employment giving rise to steadily improving commercial real estate performance at the asset level, “there is no sign that either the growing pains in China or the stock market turmoil in the US are impacting the fundamental performance of commercial property,” according to RCA’s report. Still, the report notes that “uncertainty is out there” and one factor that looms large is “fear of the unknown as policy instruments change.” Following the Global Financial Crisis that reached its nadir in late 2008 and early 2009, RCA’s report recounts, “Commercial property prices recovered after the Federal Reserve Bank fought deflation across the economy as a whole. As policies change, the concern is that asset values will slide again.” And RCA cites—and, for the most part, rebuts—a number of market qualms giving rise to that generalized uneasiness. One is “uncertainty around the debt portion of the capital stack,” and in fact the pace of growth in the total level of debt across the US economy has been slipping for the past year. Yet RCA notes, “At the moment, there has been no such pullback in the liquidity of commercial real estate debt.” The end of the Fed’s quantitative easing policy and the central bank’s move toward normalizing the interest rate environment is giving some industry players concern that investors will look at vehicles other than CRE. “If the economic concerns about China fade, economic growth is steady and the Federal Reserve continues short-term rate rises, then commercial real estate may not be as attractive an alternative as it was in recent years,” according to the USCT report. “Still, an environment where growth is stable would make an argument for the yield play for commercial real estate. If anything, the risk there is a move to a more boring market.”