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Despite record, commercial real estate shows warning signs

Lawrence Lewitinn
Lawrence Lewitinn

Recent record data in commercial real estate may be masking some warning signs in the property market.

The U.S. commercial real estate market just posted its second-best January ever, with $44.6 billion in transactions for that month alone, according to Real Capital Analytics. The data firm’s figures tally properties and portfolios of such things as office complexes and income-producing apartment buildings valued above $2.5 million.

January’s number combined with the $73 billion in transactions for December brings the commercial property market to its highest dollar total for any 60-day period ever.

While the dollar number is up 12.7% from last year, the volume of transactions is down 7% from January 2015, notes Jim Costello, vice president of Real Capital Analytics.

It is the momentum issue that's of concern,” he said. “A sign of reduced liquidity and fewer transactions, that's a bit of a caution flag. ... It's still a huge number of deals that happened in in the month, but it's a momentum issue that has people concerned.”

The type of transaction also gives Costello some concern. “A significant portion of it – 42% – was tied up in portfolio or entity-level sales,” he said. “That's a situation where a very large capital source, often a global capital source, will come in and buy a whole slew of buildings at once.”

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However, the sale of individual properties – the cornerstone of the commercial real estate market – was down 18% from the previous year.

Nonetheless, Costello remains optimistic about the U.S. commercial property market despite – or because of global market volatility.

“Compared to other parts of the developed world, we’re still the fastest growing, most stable, most secure location,” he said. “There's still a lot of foreign capital that needs safety and stability, and I think they'll be looking to the United States. Well-leased commercial real estate is going to act as a bond equivalent for these investors. And I think we're going to continue to see capital inflows for that.”

Although there are some concerns that buyers from China will pull back on their U.S. investments, Costello expects money to find its way to American commercial properties.

There are a few signs that foreign buyers are reassessing what they're doing,” he said. But the funny thing I think will also happen, just given the turmoil that we see in a place like the Middle East, [is that] there are a lot of very wealthy individuals that need a safe place to park capital. I think we're starting to see signs of that money coming out of the Middle East to the United States just given the ongoing turmoil in the region.”


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