From BisNow National Capital Markets February 06, 2018 Champaign Williams, National Editor, photo by Martin Ceralde
Commercial real estate pricing entered 2018 on a low note. Nationwide prices fell 0.3% last month, representing the ninth consecutive month of declines.
“We edged off historic highs. The declines over the last three quarters have been mild and more of a stagnation than a decline,” Ten-X Senior Quantitative Strategist Chris Muoio said. “Prices have plateaued.”
As prices continue to fall, the industry’s aggressive fundraising efforts have left an abundance of dry powder — cash reserves set aside for investment purposes — in the market.
Billions in capital that is not deployed, coupled with a lack of attractive investment opportunities, has contributed to the slight drop in commercial real estate valuations.
“I think the issue is that the money raised last year has not been spent,” Harvard Graduate School of Design lecturer Raymond Torto told Bisnow via email. “Lack of product is the culprit.”
As of December, global real estate funds had a whopping $249B available in dry powder, up from 2016’s $237B available in cash reserves, Prequin reports. Much of this dry powder is concentrated on investment opportunities in North America and Europe.
As many sit on the sidelines in search of deals that offer better risk-adjusted returns, heated competition is forcing buyers to take on riskier assets. Investors in search of stable, cash-flowing properties today are increasingly turning to secondary and tertiary markets for better returns. Though properties in these markets are deemed more risky, these assets can be quickly flipped and sold to turn a profit, Torto said. Others are looking beyond stable assets to projects under construction for returns.
About 65% of respondents surveyed by Prequin, in its 2018 Real Estate Spotlight report, said it is more difficult to find investment opportunities than it was a year ago. Survey respondents also said they are competing more frequently with firms that have large stockpiles of capital.
As a result, much of this year’s capital will go toward higher-risk investment opportunities, such as opportunistic and value-add assets, Prequin reports.
The Biggest Losers
The hotel sector led the drop, posting a 1.1% decline from December to January, followed by the apartment sector, which experienced a 0.5% decline. Office real estate was the only sector to experience a jump in pricing last month, by 0.6%.
That’s according to online real estate transaction marketplace Ten-X’s CRE Nowcast, which uses proprietary technology, Google trends data and investor surveys to determine what is happening with commercial real estate pricing in real time.
Muoio said there are several conflicting dynamics affecting commercial real estate pricing. While rising interest rates have caused investors to tread lightly in fear of higher borrowing costs, the new tax system could provide a boost to industry, propelling pricing upward.
“We’ll be looking to see if recent tax cuts and strong economic fundamentals bring CRE pricing back up to positive gains throughout 2018,” Ten-X Chief Economist Peter Muoio said in a statement.