Refinancing Deals Drive Capital Markets Activity in 1H

Deal volume has fallen sharply since the onset of the pandemic, but luckily refinancing transactions have kept the capital markets moving. In the first half of the year, refinancing activity drove the majority of the US capital flow.

According to new data from Real Capital Analytics, refinancing accounted for 50% of all capital flows to commercial property in the first half of the year. By contrast, new acquisitions accounted for only 30% of US capital flow to commercial property, despite the low interest rate environment. This aligns with the decrease in national sales activity, which fell by 67% in August. Year-to-date, national investment sales are down 36%, on par with the capital markets activity for acquisitions.

In a larger sense, this trend isn’t all that different from a typical market cycle. Refinancing deals generally drive US capital flows, although to a lesser extent than is happening now, Real Capital Analytics notes. In the first half of 2019, refinancing deals accounted for just under 50% of market activity, and new construction financing was on par with activity this year. Acquisitions were slightly higher, but not enough to show a significant change in trend.

On the bright side, this is a significant departure from capital markets trends following the 2008 financial crisis. At that time, the capital markets came to a near halt, and it was challenging to refinance cash-flowing, stable properties. As a result, property owners have been able to hold onto their properties, mitigating defaults and stabilizing prices. And, in some cases, prices have actually increased.

Acquisition financing could be in for a boost at the end of the year, however. A recent Capital Markets report from Marcus & Millichap have forecasted an acceleration in deal activity in the fourth quarter due to Asian and European capital sources entering the US investment market. These foreign investors are arriving in the US for low interest rates and yields of 2.5% to 3%. These institutions are looking multifamily and built-to-suit industrial. In addition, they are also considering some pre-leased office opportunities.

Buyers and sellers, however, continue to see pricing discrepancy. Many sellers, particularly those able to refinance, are not reducing asset prices, and buyers want a discount for the new market conditions. A survey from CBRE showed that 61% of buyers expected a pricing discount while only 9% of sellers were willing to reduce pricing. This disparity could continue to hamper investment sales activity, even as foreign investors arrive and interest rates remain low.