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Commercial real estate just had its biggest year since the financial crisis

Lawrence Lewitinn
Lawrence Lewitinn

While much as been discussed about the housing market, commercial real estate had a big year in 2015.

Preliminary figures show sales of income-producing properties priced above $2.5 million totaled nearly $504 billion, according to data compiled by Real Capital Analytics. That figure is likely to grow more when the final values are tabulated, but as it stands, that's the most in one year since 2007.

The overall growth in commercial real estate was 16% higher than in 2014, though the increase wasn’t spread evenly across sectors. Industrial and hotel properties saw a 40% or higher increase in transaction dollar volumes, while retail properties and development sites saw drops.

As a comparison, existing single-family homes saw a decline of 10.5% in the seasonally-adjusted annual rate of sales for November, the most recent reported month, according to the National Association of Realtors. However, existing home prices climbed 6.3% on an unadjusted basis in that time.

The downturn in retail property trades may be a secular trend, according to Real Capital Analytics vice president Jim Costello.

“Retail is still having some trouble,” he said. “We have a lot of retail that just doesn't make sense anymore given the location in terms of the big-box activity and all the competition from the Internet as well.”

REITs, which are generally more interest rate sensitive compared to direct real estate investments, saw a more modest gain in 2015 because of rate hike anticipations, said Costello. The FTSE NAREIT Composite Index (FNCO.L) saw a 2.1% increase last calendar year.

However, Costello expects REITs may benefit somewhat from a recent change in legislation. On December 21, 2015, U.S. President Barack Obama signed into law a change in the Foreign Investment in Real Property Tax Act (FIRPTA) allowing foreign investors to hold 10% of shares in a U.S. REIT, up from the previous amount of 5%.

“When you remove artificial barriers to capital movement, that could have a tremendous impact on price,” said Costello. ”I wouldn't be surprised if that capital movement helps support prices in the year.

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Foreign direct investment has generally been attracted to major markets like New York City and San Francisco, where high-priced deals make the effort worthwhile for overseas buyers. But smaller markets are seeing some foreign money trickle in as well. Costello cites FTSE NAREIT's recent investments in the U.S.

“These portfolios that they bought had exposure to a lot of secondary and tertiary markets,” he said. “We'll probably see more in the year ahead because there still is tremendous appetite for that sort of safe, yield-driven investment that commercial real estate provides. And when you get into secondary and tertiary markets, the price of what you're getting relative to the amount of dollars income your receive every month is going to be a lot higher.

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