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U.S. Property Sales Fall 8% in the First Half of 2018

Office, Retail Properties Post the Biggest Sales Declines
July 20, 2018
One of the largest office sales in the first half of 2018 was 5 Bryant Park in New York City, which Savanna Capital acquired in May from The Blackstone Group for $640 million.

Commercial real estate sales fell 8 percent in the first half after years of record trading left fewer high-priced properties on the market.

About $220 billion of office, industrial, hotel, multifamily and retail properties traded hands in the first six months of 2018, according to CoStar data. That’s down from $238.8 billion in the first half of 2017. Office sales slumped 17 percent, to $55.9 billion, for the first half as retail sales fell 18 percent, to $39.2 billion. Hotel sales surged 30 percent to $18.1 billion, driven by a handful of blockbuster deals that boosted totals.

"Because transaction volume has been so strong in the last five years, many of the buildings have already sold," said Hans Nordby, managing director of CoStar Portfolio Strategy. In many cases the new owners are REITS, open-ended funds and sovereign wealth investment shops that plan to sit on the properties. "They’re not ready to sell again."

There were nominal declines in both apartments, at 3 percent, and industrial, dropping 2 percent in the first half. About $70.2 billion of apartments were sold in the first half, and $36.8 billion of industrial properties traded.

Fundamentals -- occupancy, rent growth -- have softened in a few markets, perhaps giving investors pause. And investors are rattled about the profound effect e-commerce is having on retail real estate. But generally, speaking, demand for assets is strong, analysts say, but in many cases, there are fewer sellers of high-priced properties.

Sales have been coming down slowly since 2015, which is now seen as the market peak. In the first half of that year, sales exploded to $271.4 billion, on their way to a cycle-high of $581.4 billion for the year. Historically, sales are higher in the second half of the year.

The drop in volume though runs counter to the steady demand for U.S. real estate from investors and capital-raising for investment in the sector.

"There is as much dry powder out there as ever," said Kevin Shannon, co-head of brokerage Newmark’s capital markets division. "But the big downtown trophy deals have traded, and they’re not going to trade again."

Shannon said clients are looking over secondary markets for investments, but those deals are smaller and will not drive velocity.

Alan Pontius is national director of brokerage Marcus & Millichap’s Institutional Property Advisors. He said the dip in volume simply reflects that shortage of offerings, and that late in the cycle deals tend to get smaller, as investors spread into secondary markets and properties that can benefit from upgrades or increased efficiencies.

The investment sales market, he said, remains strong. This isn’t the end of the last cycle, which ended in a calamitous crash in real estate.

"Actually I’m going to argue that flat isn’t so bad," he said. "Because we’ve been at a heightened trading level that has escalated, and escalated, you’re flattening out at historically high levels."

Despite the dip in sales, demand for industrial and apartment properties are strong almost across the country.

"Investor interest in industrial is so strong," said CoStar’s Nordby, "that it’s borderline rabid."

Most institutional investors who have been flocking to industrial this cycle, though, need to acquire large portfolios for hundreds of millions of dollars and not do dozens of small individual deals.

In that sector as in the others the availability of properties for sale will decide what happens in the next two quarters.

FIRST-HALF RESULTS FOR HOTELS: Hotel Sales Surge in First Half, Powered by Large Deals Involving Private Equity Funds

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