Ever since the financial crisis and recession of 2008, a lot of potential investors have been waiting for a sign that it was safe to rejoin the commercial real estate (CRE) market. Even if prices are low, investors don’t want to be stuck with a property they can’t sell. The sign of better times for the commercial real estate market may have come in the form of a recent report from Auction.com which found that the CRE market has seen a significant boost in the last year. This article will examine the Auction.com report on commercial real estate and what the data means for business owners, investors and property owners.
The main takeaway from the report is that the CRE market is improving dramatically. Total CRE deal volume in the first quarter hit a new all-time peak at $124.3 billion. A record high is amazing in itself, but it should also be noted that this is a 47.4 percent increase from a year ago and a 0.1 percent increase from the prior quarter.
A situation where the first quarter sales volume is higher than the fourth quarter is unusual for CRE markets. Investors try to finalize their transactions in the fourth quarter, before the end of the tax year. This means fewer transactions and causes a first-quarter pullback in deal volume. According to Auction.com, this is the first instance of a Q1 quarter-over-quarter increase since 2007.
“Investors continue to drive up market prices and compress cap rates, which suggests that they’re probably ahead of what the underlying fundamentals would support, especially in some of the hotter markets and sectors,” said Auction.com Executive Vice President Rick Sharga. “Part of this is due to the availability of capital and the low interest rate environment we’re in. But the continuing infusion of foreign capital is also a big factor – China and Singapore investors in particular have ramped up their U.S. CRE investment, and the $1.95 billion purchase of the Waldorf Astoria in Manhattan by the Chinese firm Anbang Insurance Group was the highlight of the first quarter.”
The Auction.com report also had good news when it came to prices. Though they didn’t see the jump seen in sales volume, prices are rising steadily, keeping with a current upward trend. In total, prices are up 15.9 percent from a year ago. The biggest gains were made by office, apartment and industrial sector properties, whose prices are up 15.9 percent, 16.6 percent and 17.3 percent, respectively, from a year ago. Retail pricing rose 13.7 percent and hotel pricing was up 10.8 percent from the previous year. This is good for those sectors since the prior two quarters were lackluster.
Real World Applications
Since Auction.com stands to benefit from increased CRE activity, the results from their report have to be taken with a grain of salt. However, if the data is accurate, there are implications for business owners, property owners and investors.
For business owners (or potential business owners) who want to open a new store, now is the time to sign a lease. As the CRE market improves, rental rates are going to increase. When properties are sold, the new owner wants to make that money back as soon as possible, so all new tenants will see higher rents than a year, or even a few months, ago. Business owners who wait to sign a lease may find that money they wanted to use as a cushion can end up going to rent.
The time is also right for investors to get back into the CRE market. As demand continues to rise, so will prices. The goal is “buy low, sell high”, and the “buy low” window is shutting fast. An investor who tries to buy a CRE property in six months to a year from now will be paying someone else’s “sell high” price.
Though it’s a seller’s market, it doesn’t mean property owners can just sit around. Higher prices mean more properties on the market. Property owners can’t rely on low prices to catch investors’ attentions. This means improving properties before putting them on the market and taking the time to create eye-catching visual and financial presentations.
Even when all the data is available, real estate markets are difficult to forecast. That said, this recent data from Auction.com is promising and gives business owners, investors and property owners a lot to think about.