Late last year, analysts released their forecasts of 2010 investment market conditions. Several including Grubb & Ellis expected a gain in property sales volume of around 30 percent from the depressed levels of 2009. We did say that a much bigger increase was possible if buyers and sellers could reach a consensus on values, ending the stalemate that began when financial markets first seized up in August 2007.
With September data from Real Capital Analytics just released, we now have a picture of 2010 through the third quarter. It appears that yours truly was too pessimistic. Year-to-date sales transactions totaled $60.4 billion of apartment, industrial, office and retail properties valued at $5 million and up – 82 percent above the same period in 2009. RCA states the following:
“Transaction volume has risen and yields have compressed in each successive quarter this year, not only for the overall market but within each property sector as well. Other positive indicators include the mix of investors bidding vigorously on certain assets, an improving rate of distress workouts largely offsetting new inflows that are ebbing, easing credit markets, increasing portfolio transactions and strong forward momentum heading toward the year-end. All these factors support a growing sense that the market has turned a significant corner on the path to recovery.”
Investors are focused on the upper end of the quality spectrum – core properties in primary markets. This is evident in the average deal size of $21.3 million year-to-date versus $14.1 million during the same period in 2009. Although the dollar volume of transactions has risen by 82 percent this year, the number of transactions is up by just 20 percent.
Very low interest rates and disappointing returns on other asset classes are fueling investor demand for commercial real estate despite the weak economy. The potential for higher inflation down the road also seems to be a plus for real estate, which is viewed as an inflation hedge.
Robert Bach, SVP, Chief Economist, Grubb & Ellis