A recent dip in investment sales transactions has sparked questions on whether the decline is a temporary hiccup or a sign of a bigger slowdown ahead.
The latest sales data from New York City-based research firm Real Capital Analytics (RCA) shows that transaction volume in February fell a whopping 46 percent year-over-year, with total sales of $25.5 billion. Sales saw a similar sharp month-over-month drop of 45 percent compared to January, when investment volume was nearly on par with last year at $46.2 billion, according to RCA.
It may be too soon to tell whether that sales activity represents a temporary pullback or a bigger market shift. However, the latest Urban Land Institute (ULI) Real Estate Consensus Forecast that came out in April is predicting a decline in transaction volume over the next three years. After peaking at $534 billion in 2015, transaction volume is expected to fall steadily to $525 billion in 2016, $500 billion in 2017 and $475 billion in 2018, according to the ULI Forecast.
The U.S. investment sales market was moving at a pretty torrid pace last year, says Tom McNearney, chief investment officer at commercial real estate services firm Transwestern. “So it is not surprising to see things settle down and take a breather,” he says.
At the tail end of 2015 there was a lot of business being done. So it did spin the pipeline a little bit, agrees John Chang, first vice president, research services, at brokerage firm Marcus & Millichap. On top of that, negative headlines related to slower economic growth in China spurred considerable volatility in the stock market. However, that caution has eased back and there remains a lot of capital available for investment.
Understandably, investors started the year a bit uncertain. “So there was just a gap there where transactional activity slowed down a little and then it picked back up again,” says Chang.
The first quarter Marcus & Millichap and NREI Investor Sentiment Survey, shows that overall investor sentiment supports continued transactional growth. “Granted, it will probably be modest. It won’t be a huge jump this year. But, I anticipate that 2016 will see a little bit more growth in transactional activity over the course of the year,” says Chang.
Based on preliminary estimates from Marcus & Millichap, first quarter sales activity related to the number of transactions specifically is on a similar pace to last year.
However, there could be a difference in dollar volume as there were a number of large portfolio sales and institutional transactions that helped boost 2015 sales volume to a high of $542.8 billion. In February, portfolio sales and entity-level transactions dropped 70 percent, while single asset sales declined 26 percent, according to RCA. That activity could be lower this year from a dollar perspective. However, there are still many portfolios that could come to the market in 2016, adds Chang
Sales activity could also be impacted by current market pricing. Cap rates have dropped below the peak levels that existed in 2007. So there is some concern that the market is at or near peak pricing, and in some cases assets may even be over-priced.
“I don’t think we are over-priced, because we still have very positive fundamentals for real estate across the board,” says McNearney. Yet some investors may dial back a little bit on their buying this year, given the fact that the U.S. is now seven years into its expansion cycle. “I think that’s healthy and to be expected,” McNearney adds.