Our forthcoming 2016 Capital Flows Year-End Review and Outlook report highlights several important trends in the transactions of U.S. commercial property. One trend especially worth highlighting is the swing in activity from the most expensive markets in the top metros to more affordable options in secondary and more suburban markets. Peaking pricing and the associated fall in returns for trophy assets seem to be the primary drivers. Investors also seem more willing to consider late-recovery secondary markets.

Last year saw a marked shift in investments from primary to secondary markets as elevated pricing in the leading markets seems to be nudging investors to seek out greater returns beyond the usual metros. The primary markets comprise New York, Chicago, Los Angeles, Boston, Washington, D.C. and San Francisco. However, in the industrial sector, the primary markets are Los Angeles, Dallas, Chicago, Northern New Jersey, San Jose and Riverside.

In fact, secondary markets captured a greater share of investment dollars (44.3%) than the primary markets (42.3%) for the first time in more than a decade. Among the top transaction metros outside the six biggest: Seattle, Atlanta, Denver and Phoenix.

Source: Real Capital Analytics and Colliers International

Deal flow in secondary markets actually grew by 3.5% in 2016, while falling 11% in major markets. In sum, the share of transactions in primary markets fell 3.1 percentage points while secondary market share rose 3.2 percentage points. The tertiary market share was essentially flat at 13.4% of the market.

In a related trend, last year saw a continued shift of investment dollars in the office sector toward suburban markets (56.8% of total sales) and away from CBD office (43.2% of total sales). As recently as 2014, their shares were virtually equal. Similarly, the garden apartment share of multifamily investment rose last year at the expense of mid- and high-rise apartments. Garden apartments tend to be located in suburban markets while higher-rise products are more typically found in cities. In both cases, lofty CBD pricing seems to be the biggest reason.

One exception to this trend: full-service hotels, generally located in cities, saw a strong increase in its share of the hotel market (+3.8%), while the share for limited-service hotels fell by an equal amount. However, this sector is much smaller ($35 billion in sales in 2016 vs. $143 billion in office sales and $159 billion in multifamily) and thus not as significant.

It should be noted that the decentralization of investment activity is a trend that typically occurs as property markets approach their peak.

In terms of individual metros, deal flow volumes largely mirror the size of major population centers, with the top four spots largely unchanged from 2014 and 2015. Manhattan maintained its hold on the top spot, with more than $40 billion in transactions last year, though down 30% from a year earlier. According to Real Capital Analytics (RCA), Manhattan accounted for seven of the top 10 deals last year and 13 of the top 20, including the four largest: 787 Seventh Avenue ($1.94 billion), Citigroup Center ($1.88 billion), the PaineWebber Building ($1.65 billion) and 550 Madison Avenue ($1.42 billion).

Los Angeles remained in second place with $28 billion in transactions, up 5% on the year, while Dallas ($21 billion) edged out Chicago ($20 billion) in the next two places. Atlanta ($17.4 billion) remained in the fifth spot, while Seattle nudged ahead of Boston for six and seven. San Francisco remained in eighth, ahead of Denver — which jumped from 17^th in 2015 to ninth. Phoenix rose one spot from last year to crack the top 10. Among the big losers last year: Houston, Northern New Jersey and the Washington, D.C. suburbs, all of which fell in the ranking.

These and other trends are covered in our forthcoming report, “U.S. Property Markets Still Robust but Approaching the Top of Cycle.”