2018 Capital Flows Year-End Review and Outlook

by | 25 March 2019

The Last Hurrah? U.S. Property Markets Surge but Upswing is Unlikely to Last

As highlighted in Colliers’ 2018 Capital Flows Year-End Review and Outlook Report, U.S. property markets staged a healthy—and surprising—comeback in 2018. Sale transactions surged 15% over 2017, recording the second-highest volume of this cycle and reversing two straight years of declines. Looking forward, we see continued vigor in U.S. property markets on the strength of robust operating fundamentals, economic out-performance relative to every other advanced economy, and still compelling property returns, making the U.S. an attractive investment for off-shore and domestic investors alike.

However, we fully expect transaction volumes to resume moderating, and price appreciation and property returns to continue easing, as the U.S. economy slows this year and especially into the year 2020. Our base case now calls for the U.S. economy to at least temporarily avert recession with a “soft landing,” which should support prices at current levels, but the slowing economy will take some of the loft out of real estate capital markets.

Key Takeaways:

  • Investment capital flows in 2018 surged to their second highest level of this long cycle, with sales volume picking up momentum in the second half of the year, reversing two years of declines.
  • However, most of the gains occurred through company takeovers or mergers—as entity-level sales almost tripled—while sales of individual assets and portfolios grew more modestly. Excluding M&A activity, sales grew by 6% overall and 9% for larger deals of at least $25 million.
  • Every major property sector registered year-over-year gains and rose more in 2018 than during 2017. Multifamily again led all sectors in total volume, followed by office, but retail surprisingly posted the largest gains in market share among the four major property types, while hotels boasted the biggest annual gains of all, and senior housing sales fell sharply.
  • Investors continue to shift capital from primary into secondary markets particularly for foreign investors, who feel increasingly confident seeking greater returns outside the top markets. However, reversing trends from previous years, central business districts (CBDs) gained at the expense of more suburban products: sales of CBD offices and especially high-rise multifamily buildings rose sharply while garden apartments were flat and sales of suburban offices fell.
  • Pricing remains strong as values increased in all major sectors compared with a year ago, led by apartments and industrial, while office also posted solid gains, though prices of CBD offices fell in the top markets. Appreciation was significantly stronger in the secondary markets in most sectors, reflecting the record pricing in most major markets.
  • U.S. property remains attractive for both domestic offshore investors, and the share of global investment rose last year. The U.S. economy continues to outperform most developed nations, while U.S. property returns remain relatively high. Despite recent increases, interest rates are still relatively low by historic standards, so U.S. property returns remain compelling.

For more insights, explore the 2018 Capital Flows Year-End Review and Outlook.