Lodging, Office Sectors See Strongest Gains as Yield-Seeking Investors Target All Types of CRE Across Broad Array of Markets
For buyers and sellers of commercial property, 2013 was a very good year. By the time all CRE sales are tallied, total commercial real estate sales are expected to be more than 18% higher in 2013 from the previous year as U.S. property fundamentals and the economy continued to improve and investors in all property types fanned out into smaller markets in search of higher returns.
According to CoStar COMPs data based on property transactions of all sizes that closed by Dec. 31 and were recorded as of Jan. 15, sales of office, industrial, retail, multifamily, hospitality and land totaled $366 billion in 2013 -- 17% higher than the $312.4 billion in property that changed hands in 2012. CoStar continues to track down and tabulate additional 2013 property transaction activity, which is expected to boost total sales for 2013 to nearly $370 billion when all deals are counted.
In any case, the preliminary figures clearly reflect the strongest year for CRE investment since 2007, when $489.6 billion in total transactions were recorded.
As of the second week of January, property sales totals for the fourth quarter of 2013 were below the record-setting volume of a year ago, with a preliminary $106.3 billion in sales tallied as of Jan. 15, though that number is almost certain to rise in coming days and weeks. Property sales spiked in December 2012 as investors hustled to close deals prior to year-end, driven in part by concern over anticipated tax hikes and the restoration of previous tax rates for capital gains. The rush helped drive total CRE sales volume to $115.86 billion in fourth-quarter 2012.
In CoStar's just-released national market reports, vacancy rates decreased and net absorption continued its strong pace in the U.S. office, industrial and retail markets.
Editor's Note: CoStar economists will drill further into the most recent fourth-quarter and yearend 2013 numbers starting with the State of U.S. Office Market Yearend 2013 Review and Forecast on Jan. 23, followed by review and forecast webinar presentations for the industrial market on Jan. 30, retail on Feb. 6 and multifamily on Feb. 13. CoStar subscribers may log on and click the Knowledge Center tab at the top of the home page to register.
For commercial property sales tallied as of Jan. 15, investors were especially active in the hotel property sector, with hospitality investment seeing a 40% increase to lead all major property categories in 2013, followed by sales of industrial property, which increased 23%. Office sales rose 18% and led all building types in dollar volume, followed by multifamily sales, which rose 14%.
Retail property sales rose 10% over 2012, while land sales increased 5%.
Rebounding Investment Activity Evident in Major Markets
The rebound in activity in the Manhattan office market helps tell the story of the U.S. office investment market last year. More than a half-dozen building sales and partial equity stakes in buildings were valued at more than $1 billion in 2013, all located in Manhattan. In 2012, no single-property CRE sales eclipsed $1 billion. Similar blockbuster transactions closed in the industrial, retail, multifamily, hospitality and land markets around the U.S. during 2013.
Another hallmark of 2013 was the spread of activity into secondary and tertiary markets in all property types as rising prices and diminishing supply compelled investors to seek higher yields outside of New York City, Chicago, Washington, D.C., Los Angeles and San Francisco.
The booming Texas economy and the recovery in other Sun Belt markets has sparked investor demand in such non-gateway markets as Austin, Dallas, Houston, Denver, Phoenix, Miami and Atlanta, according to Steve Pumper, executive managing director of capital markets for Transwestern.
"In our estimation, this recovery will continue into 2014 and beyond," Pumper said. "For the Sun Belt markets that have not yet experienced rent spikes, we expect them to see increases within the next 12 to 18 months."
Interest Rates Remain Top Concern
The main question facing commercial property investors in 2014 is what will happen with interest rates. The 10-year Treasury bond yield, currently around 2.88%, could increase to 3.25 to 3.50%, possibly impact property pricing and development costs, Pumper said.
The improving economy also translated into stronger investment volumes around the world, with a solid fourth quarter pushing global 2013 investment volumes up 18% to $549 million, according to preliminary figures from Jones Lang LaSalle.
"The desire of experienced investors to look at opportunities which require additional asset management or more creative solutions has helped push 2013 volumes past our initial expectations," said Arthur de Haast, lead director with JLL's International Capital Group. "With this trend expected to continue into 2014, we are confident that investment volumes will continue to grow."