Commercial real estate transaction volumes in the US surged in the second quarter, with portfolio deals on the rise, according to latest RCA figures. Peter Slatin looks at the details
The velocity of commercial property investment increased markedly in the second quarter. US investment volumes surged to $55.6bn (€38.4bn) in Q2, representing a 117% increase from a year earlier and just shy of the year-end spike in transactions recorded in Q4 2010. For the first half of 2011, property sales totalled $90.6bn and should readily surpass the $200bn mark for the year.
The acceleration in sales cut across all property types but was led by retail property sales of $15.2bn, spurred by the June closing of Blackstone's $9.2bn acquisition of Centro Properties' US shopping centre portfolio. That deal underscores a return of large portfolio transactions; portfolios accounted for $17.5bn in Q2, and another $6.5bn of portfolio transactions are currently reported in contract.
Overall, property size and value rose. In the first half of the year, 130 transactions of individual properties or portfolios were valued at $100m or greater, a sharp rise from a year earlier. The proliferation of these transactions is a good barometer for both improving credit conditions and investment demand.
Prices were generally stable or improved over the quarter, and did not respond negatively to the increasing array of assets on the market. The dichotomy in pricing between the favoured major markets and all others - that first became apparent in late 2009 - persisted; some closing of the gap has been noted in apartment and retail. This had spread midway into the third quarter, although it is unclear how that trend will be affected by growing market volatility.
Building owners expressed increasing optimism in Q2 through a flood of new offerings valued at more than $76bn as the increased breadth and depth of the recovery encouraged many more investors to list properties for sale. The volume of offerings in Q2 jumped 79% from a year earlier, the highest year-over-year gain since 2005 - the point that marked the end of the previous post-recessionary period and the beginning of the pre-crisis property boom.
Most property types should readily absorb this new supply of offerings, except the industrial sector, where offerings exceed closings by more than two to one. A large proportion of offerings were also recorded for central business district (CBD) office properties, providing a true test of investor demand that had appeared insatiable before the debt-ceiling crisis and controversial US credit downgrade.
The distressed-property market also sent some encouraging signals, although the amount of trouble in the pipeline remains daunting. New mortgage defaults, foreclosures and transfers into special servicing slowed to $12.3bn in Q2 - a hefty amount, but the lowest quarterly inflow total since the onset of the recession. Workouts totalled $15.9bn during the quarter, shaving $3.6bn in outstanding distress from a pool that still stands above $180bn. The most notable change, though, was a turnaround in workout strategy: one year ago, the level of workouts through ‘pretend-and-extend' - that is, loan modification and restructuring - was virtually equivalent to the level of workouts through liquidations. But lenders have turned sharply away from the loan modifications, opting instead for liquidations by a six-to-one ratio in Q2, another nod to the improving pricing environment.
In the wake of turmoil in the bond market that began in late spring, many commercial mortgage-backed securities (CMBS) slowed originations and, although that does not appear to have had a negative impact on volume in June, it has already cut into volume in Q3; the extent of the disruption remains to be seen.
The rise in large multi-market portfolio transactions also signals a growing bullishness on entire property sectors, as opposed to smaller bets on specific assets in favoured markets. In the first half of 2011, 25 markets surpassed $1bn of property sales with all but one market in the top 40 recording gains. San Diego and Atlanta moved into the top 10, edging out Houston and Seattle. Washington DC leapt to fourth thanks to apartment and hotel sales.
Markets that had been lagging in the rebound of transaction volume such as Atlanta, Phoenix, Las Vegas and Philadelphia registered some of the largest year-on-year increases. Among markets recording sub-par results are Houston, San Jose, and Orange County, as well as secondary markets such as St Louis, Baltimore, Tampa, and Portland.
In a signal that investors are embracing smaller cities, tertiary markets as a group outperformed primary and secondary markets in the rate of increased volume. Over $16.5bn of sales were recorded in tertiary markets in H1 2011, up 129% year-on-year.
A look at the top five buyers year-to-date illustrates perfectly the shifting investor landscape. Private equity funds, led by Blackstone, with Related not far behind, have returned in force, while real estate investment trusts (REITs) and institutions are slugging it out as well for prime properties (figure 4). Distress-motivated sellers lead the disposition parade.
Overall, equity funds, with 21% of total acquisitions, combine with institutions to make up 39% of the market, double their market share in 2009, although still below the 49% share they had at the market peak. REITs, too, continue to be major investors, accounting for nearly one-fifth of all acquisition volume - the highest level since 2004. With all three of these groups maintaining access to low-cost capital, it is likely that they will continue to lead investment volume in the second half of the year.
As for cross-border investment in the US, buyers from Canada and Asia stood out, and overall foreign investment in the US through mid-August accounted for $13.2bn and 12% of all activity.
Peter Slatin is associate publisher, editorial director at Real Capital Analytics