Commercial Real Estate Market Survey, Q4 2015

COMMERCIAL REAL ESTATE

MARKET TRENDS: Q4.2015

National Association of REALTORS®

2

Commercial Real Estate Market Trends: Q4.2015

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does not guarantee its accuracy, and such information may be incomplete. This report is for

information purposes only.

FEBRUARY 2016

COMMERCIAL REAL ESTATE MARKET TRENDS | Q4.2015

3 NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.realtors.org/research-and-statistics

NATIONAL ASSOCIATION OF REALTORS®

2016 OFFICERS

President

Tom Salomone

President-Elect

Bill Brown

First Vice President

Elizabeth Mendenhall, GRI, ABR, ABRM,

CIPS, CRB, PMN

Treasurer

Michael McGrew, CRB, CRS

Immediate Past-President

Chris Polychron, CIPS, CRS, GRI

Vice President

Michael Labout, GRI

Vice President

Sherri Meadows, GRI, CIPS, CRB, PMN

Chief Executive Officer

Dale Stinton, CAE, CPA, CMA, RCE

FEBRUARY 2016


4 NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.realtors.org/research-and-statistics

CONTENTS 1 | Introduction…………………………………………………………………………………………… 2 | Survey Highlights..………………………………………………………………………………….. 3 | Investment Sales ………..…………..……………………………………………………………… 4 | Leasing Fundamentals ………………………………………………………………………….. 5 | Comments……………………………………………………………………………………………….

5 6 7 9 11

5

FEBRUARY 2016


NATIONAL ASSOCIATION of REALTORS® | RESEARCH DIVISION | www.realtors.org/research-and-statistics

Introduction

The REALTORS® Commercial Real Estate Market

Trends measures quarterly activity in the commercial real

estate markets, as reported in a national survey. The

survey collects data from REALTORS® engaged in

commercial real estate transactions. The survey is

designed to provide an overview of market performance,

sales and rental transactions, along with information on

current economic challenges and future expectations.

Commercial space is heavily concentrated in

large buildings, but large buildings are a

relatively small number of the overall stock of

commercial buildings. In terms of inventory,

commercial real estate markets are bifurcated,

with the majority of buildings (81 percent) being

relatively small (SCRE), while the bulk of

commercial space (71 percent) is concentrated

in larger buildings (LCRE).

The bifurcation continues along transaction

volumes as well, with deals at the higher end—

$2.5 million and above—comprising a large

share of investment sales, while transactions at

the lower end make up a smaller piece of the

pie.

Data are readily available for transactions in

excess of $2.5 million from several sources,

including Real Capital Analytics (RCA).

However, in general, data for smaller

transactions—many of which are handled by

REALTORS®—are less widely available. NAR’s

Commercial Real Estate Market Trends gathers

market information for SCRE properties and

transactions, mostly valued below $2.5 million.

GEORGE RATIU

Director, Quantitative & Commercial Research

[email protected]

-100%

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Sales Volume (YoY % Chg)

Real Capital Analytics CRE Markets

REALTOR® CRE Markets

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Sales Prices (YoY % Chg)

Real Capital Analytics CRE Markets

REALTOR® CRE Markets

Sources: NAR, Real Capital Analytics

6

Survey Highlights

• Sixty-six percent of commercial REALTORS®

closed a sale.

• Sales volume rose 7.4 percent from a year

ago.

• Sales prices increased 4.1 percent year-

over-year.

• Cap rates averaged 7.8 percent.

• The average estimated transaction value slid

from $1.9 million in Q3.2015 to $1.6 million in

Q4.2015.

NOTE:

1. In January 2016, NAR invited a random sample of 49,203 REALTORS® with an interest in commercial real estate to complete

an on-line survey. A total of 444 complete responses were received, for an overall response rate of 0.9 percent.

FEBRUARY 2016



• Sixty-three percent of members completed a

lease transaction

• Leasing volume advanced 3.0 percent from

previous quarter.

• Leasing rates increased 2.5 percent over the

previous quarter.

• Concession levels declined 3.1 percent on a

quarterly basis.

• Inventory shortage topped the list of current

challenges, followed by buyer-seller pricing gap

and local economic conditions.

0%

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2015.Q4 2015.Q3

REALTORS®’ Most Pressing Challenges

Other

Pricing Gap:Buyers vs Sellers

NationalEconomy

Local Economy

Financing

Distress

Inventory63

37

Completed lease transaction (%)

Yes

No

66

34

Completed sales transaction (%)

Yes

No

Investment Sales

While economic activity moderated during the

fourth quarter of 2015, commercial real estate

investments picked up speed. More

REALTORS® reported closing deals compared

with the prior quarter—66 percent in the fourth

quarter versus 63 percent in the third.

Concurrently, sales volume rose 7.4 percent

from the fourth quarter of 2014, accelerating

from the third quarter’s 7.0 percent.

With the shortage of available inventory

remaining the number one concern for NAR

members, price growth continued upward.

Commercial properties traded at average prices

4.1 percent higher compared with the same

period in 2014. The average transaction price

slid from $1.9 million in the third quarter 2015 to

$1.6 million in the fourth quarter 2015. A

perceived pricing gap between sellers and

buyers remained the second highest ranked

concern.

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FEBRUARY 2016



REALTORS® 2015.Q4 Prices

Office Class A($/SF) $129

Office Class BC ($/SF) $98

Industrial Class A ($/SF) $85

Industrial Class BC ($/SF) $63

Retail Class A ($/SF) $124

Retail Class BC ($/SF) $91

Apartment Class A ($/Unit) $42,280

Apartment Class BC ($/Unit) $31,505

Source: NAR

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Per

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Sales Volume Sales Prices

$0

$500

$1,000

$1,500

$2,000

$2,500

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Tho

usa

nd

s Estimated Avg. Sales Transaction Value

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REALTORS® Commercial Transaction Closing Rate

Source: National Association of Realtors®

Investment Sales - continued

Average capitalization rates compressed slightly

to an average 7.8 percent across all property

types, a 13 basis point decline on a yearly

basis. Apartments posted the lowest cap rate, at

7.2 percent, followed by industrial properties

with average cap rates at 7.4 percent. Office

and retail spaces posted cap rates of 8.2

percent and 7.8 percent, respectively. Hotel

transactions reported the highest comparative

cap rates—8.6 percent. With yields declining

slightly, the spread between cap rates in

REALTOR® markets and 10-year Treasury

notes narrowed in the fourth quarter, reaching

560 basis points.

The direction of commercial business

opportunities during the fourth quarter 2015

rose three percent, on par with the third

quarter’s figure, but slightly lower than the

second quarter’s six percent.

Members indicated that the following areas

presented the greatest opportunities:

• New Development/Construction

• Industrial

• Office

• Land

• Retail

• Regional/Local Growth

• Apartments/Multifamily

• Capital Availability/Interest Rates

• Redevelopment/Repositioning

• International Investors

• Distressed Properties

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FEBRUARY 2016



2015.Q4 Cap Rates

Office 8.2%

Industrial 7.4%

Retail 7.8%

Multifamily 7.2%

Hotel 8.6%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

REALTORS® Commercial Capitalization Rates

Office Industrial Retail

Multifamily Hotel


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-8%

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-2%

0%

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6%

8%

Direction of Business Opportunity (QoQ)


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FEBRUARY 2016



Leasing Fundamentals

Commercial fundamentals continued improving

during the fourth quarter 2015. Leasing volume

during the quarter rose 3.0 percent compared

with the third quarter 2015. Leasing rates

advanced at a steady pace, rising 2.5 percent in

the fourth quarter, even with the prior quarter.

NAR members’ average gross lease volume for

the quarter was $743,412, 31 percent higher

than the previous period. New construction

mirrored the broader economic slowdown,

posting a 3.7 percent gain from the third quarter

of this year. In comparison, the second and third

quarter’s construction gains were 5.7 percent

and 6.6 percent, respectively.

Tenant demand remained strongest in the 5,000

square feet and below segment, accounting for

75 percent of leased properties. However,

demand for space in the 10,000 – 49,999

square feet almost doubled from a year ago, to

10 percent of total. Lease terms remained

steady, with 36-month and 60-month leases

capturing 59 percent of the market.

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New Construction Leasing Volume


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Average Leased Space by Size, Quarterly*

Under 2,500 sf

2,500 - 4,999 sf

5,000 - 7,499 sf

7,500 - 9,999 sf

10,000 - 49,999 sf

50,000 - 100,000 sf

Over 100,000 sf

Source: National Association of Realtors® *Prior to 2010.Q4 "Under 5,000 sf was the lowest category available.

0 10 20 30 40

0 - 11 months

12 months

24 months

36 months

48 months

60 months

60 + months

Average lease term during last transaction (%)

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FEBRUARY 2016



Leasing Fundamentals - continued

Vacancy rates mirrored the regional and product

variations in REALTORS® markets, ranging

from a low of 6.2 percent for apartments to a

high of 15.7 percent for hotel properties. Office

vacancies declined 62 basis points to 14.3

percent compared with a year ago. Industrial

availability witnessed a yearly decrease of 17

basis points—to 11.4 percent. Retail vacancies

rose 40 basis points on a yearly basis, to 12.9

percent.

Lease concessions declined 3.1 percent.

Tenant improvement (TI) allowances averaged

$47 per square foot per year nationally.

REALTORS® 2015.Q4 Vacancy Rates

Office 14.3%

Industrial 11.4%

Retail 12.9%

Multifamily 6.2%

Hotel 15.7%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

REALTORS® Commercial Vacancy Rates

Office Industrial Retail

Multifamily Hotel


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FEBRUARY 2016



Comments

The REALTORS® Commercial Real Estate

Quarterly Market Survey asks participants to

comment on current conditions in their markets.

Below are selected remarks about the latest

market environment.

100% of my real estate is in land. Based on rather

intense research it is my opinion that land prices

have been flat since 2006. Volume of sales was the

same from 2006 - 2013, at which we have seen a

steady increase. Another negative is that total sales

in dollars has not grown since 2005, we are

currently 70% of 2005's sales in dollars.

Banks beginning to participate a bit more in this

commercial market, but still minimal. When using

bank financing appraisals coming in below actual

sale prices.

Best year on record for our market area, all sectors

broke previous highs in leasing, sales, and loans.

Concerned about an increase in interest rates and

long term capital gains tax rate up to 28% from 15%

last year.

Constrained supply in a tight geographic area where

transportation is the key factor

Evergreen is a tough retail and office market. There

is too much inventory so far in both. The proximity to

Denver has many locals shopping and working in

Denver. There is not a lot of Industrial. The

apartments are full and quite expensive. Not a lot of

room to build anything new.

I don't see much decrease but mostly flat and

steady growth. Rents may not go up much this year

since things seem to be slowing slightly.

In general we have a good market but low inventory

for special use clients. We are seeing more clients

coming from out of state or countries.

Investors are hesitant but multifamily remains

strong. Our area is underbuilt and vacancy in as

near 0 as it can be.

It has become a landlord’s market. I fear what may

occur in the economy in 1 to 2 years but positioning

should anything negative occur. Also, looking for

reasonably priced property to acquire.

Many large sales of commercial buildings to local

owners and partnerships $100 million Sale of

prominent hotels to outside interests.

Market appears mostly steady for now. Uncertainty

in national economy as well as government

regulations are playing a negative role in the

market.

Need tax decreases (state and national) on

business to spur new business growth. The

increase in capital gains taxes and health related

taxes are huge business disincentives. Lenders are

still staying short (5 to 7 year loans). Who can

afford to build a major project without long term

loans? Also who wants to venture investment dollars

with the higher taxes enacted since 2008? The

rewards do not match the risks for a lot of investors.

Northern NY is in an economic stagnation with little

prospect for improvement on the horizon.

Our local commercial market consists mostly of

smaller infill type of locations under 10,000 sq. ft.

and dominated by locations under 3000 sq. ft.

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FEBRUARY 2016



Owners are too aggressive about sale price and

lease rates. This appears to be heavily influenced

by the wide perception by branded big corp. news

and PR activity suggesting watershed growth in the

economy when in fact functional growth for the

general population has not made its way into the

pockets of the rank and file to lift the opportunity for

main street investors and entrepreneurs.

People with higher investment are thinking twice

before getting into it, due to unknown economic

effect for lower oil price.

Retail market appears to be growing in strength and

the multi-family market remains tight.

Since the big Lenders are interested to hold

commercial mortgages again, the sales market has

increased and prices have increased.

Strong Seller's market for apartment investments.

Multiple Offers on quality offerings. Bidders paying

5% to 10% over Asking Price.

Supply is constraining deals. Investors are

continuing to support lower cap rates in all asset

classes.

The impact of new handling of transparency of on

balance sheet lease agreements has major tenants

concerned.

The market in all sectors is ACTIVE, but closings

are still a challenge. Mainly due to increased bank

regulations and greater scrutiny by the BUYER.

The market is strong, with good economic

indicators. BUT there is no inventory. Major

shortage !

Comments – continued

Very low inventory for industrial, 5,000 - 10,000 SF

We were hit very hard by the economic downturn.

Prices are still going up now. Jobs are the number

one impediment to a fully healthy market, but

several companies are beginning to look to our

region for expansion/startup. The future is looking

up.

The National Association of REALTORS®, “The Voice for Real Estate,” is America’s largest trade association, representing over 1 million members, including NAR’s institutes, societies and councils, involved in all aspects of the real estate industry. NAR membership includes brokers, salespeople, property managers, appraisers, counselors and others engaged in both residential and commercial real estate. The term REALTOR® is a registered collective membership mark that identifies a real estate professional who is a member of the National Association of REALTORS® and subscribes to its strict Code of Ethics. Working for America's property owners, the National Association provides a facility for professional development, research and exchange of information among its members and to the public and government for the purpose of preserving the free enterprise system and the right to own real property.


RESEARCH DIVISION

The Mission of the National Association of REALTORS® Research Division is to collect and disseminate timely, accurate and comprehensive real estate data and to conduct economic analysis in order to inform and engage members, consumers, and policy makers and the media in a professional and accessible manner.

To find out about other products from NAR’s Research Division, visit www.REALTOR.org/research-and-statistics


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COMMERCIAL REAL ESTATE MARKET TRENDS: Q4.2015

Commercial Real Estate Market Survey, Q4 2015

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Transcript of Commercial Real Estate Market Survey, Q4 2015