Reversal of Fortune? U.S. Property Markets Stage Partial Come Back

Let the good times roll — we aren’t done yet. Sales transactions in U.S. commercial property markets picked up in the first half of 2018 (1H 2018). Though the gains were modest, amounting to just 4% over the first half of 2017, year-over-year transaction volumes rose in two consecutive quarters for the first time since late 2015, after falling in seven of the prior eight quarters. And sales of trophy and other high-priced assets faired even better, jumping almost 9% in 1H 2018.

The news has not been uniformly favorable. Trades of office properties in suburban and especially downtown locations have dropped considerably, while sales in all sectors aside from industrial are well off cyclical highs reached in 2015, now three years ago.

Nonetheless, overall demand for U.S. property remains robust. Neither trade tensions between the U.S. and its leading trading partners nor rising interest rates seem to be impacting foreign demand for U.S. property. Though China continues to offload recent acquisitions and pull back from new purchases, offshore demand has grown much more than domestic demand.

Key takeaways from this report include:

• Investment capital flows remain robust by historical standards. Overall transaction volumes for 1H 2018 were up 4% from a year ago (1H 2017). Year-over-year transaction volumes rose in each of the past two quarters, reversing a string of mostly negative trends.
•  Multifamily led all sectors in total volume, but the industrial sector continues to post the largest gains in market share among the major property types. Hotels boasted the biggest annual gains of all, with sales up 38%, though on half the volume of industrial. Meanwhile, office was the weakest of the major sectors, down 13% on the year.
• Entity and portfolio purchases have staged a moderate comeback this year, gaining almost 10% during early 2018, while individual property transactions have been relatively stable with just a 2% gain. Still, multi-property transactions are nowhere near their former significance, down over 40% since 2015 while individual property transactions are about the same.
• Investors continue to shift capital from primary into secondary markets, and from CBDs into inner suburban submarkets — especially for apartments and offices — and particularly for foreign investors, who feel increasingly confident seeking greater returns outside the top markets.
• Pricing remains strong as values increased in all sectors in 1H 2018 over a year ago, led by apartments; office and industrial properties also registered strong gains. Appreciation was generally stronger in the secondary markets, reflecting the rich pricing in most major markets.
• With the U.S. continuing to outperform most developed economies and interest rates still relatively low by historic standards, U.S. property remains attractive for investors, which will keep property capital markets strong and attract offshore capital to our markets, despite rising trade tensions.

For more insights, explore the 2018 Capital Flows Midyear Update.