Commercial Real Estate Lending Volume Increases 35%
Following on the solid 24% yearly gains in 2012, commercial real estate investments notched a very strong first quarter of 2013. Sales of major properties totaled $72.8 billion in the first quarter, a 35% rise from a year ago, according to Real Capital Analytics. Portfolio transactions made up a large portion of the volume, especially due to the sale of Archstone apartment properties to Equity Residential and Avalon Bay. Individual property sales comprised $40 billion, a 7.8% gain from the same quarter last year.
Prices for commercial properties were up slightly in the first quarter. Cap rates inched up slightly, to an average 7.5% nationally across all property types, mostly due to a redirect in investments towards secondary and tertiary markets.
Commercial practitioners should acknowledge this early investment activity as a very positive development which should create more business opportunities for members on the brokerage, leasing and management side of the industry.
The rise of secondary and tertiary markets, which began during 2012, has intensified in early 2013. Faced with lower inventories of top properties in major metropolitan areas, investors have been searching for the higher yields of performing properties in smaller markets. During the first quarter, in terms of nominal volume, New York and Washington, D.C. metro areas dominated the landscape, with close to $20 billion in combined sales.
However, on a year-over-year basis, the first quarter recorded 16 individual markets with triple- digit gains in sales, most of them being secondary markets. Jacksonville posted the strongest sales gains, up a whopping 625.2%, boosted primarily by apartment and office sales. Closed transactions in the Virginia and Maryland suburbs of the nation’s capitol also jumped significantly at 295.3% and 199.1%, respectively. The surge in sales was driven by large office and apartment property (Archstone portfolio sale) transactions in both markets. Other markets with noticeable investment surges were East Bay, Westchester, Kansas City, San Antonio, St. Louis, and Long Island.
After several years of drought, the lending spigot opened a little wider during 2012, as every lender group upped its volume. With asset valuations rising and record low interest rates still in place, lending provided a firmer foundation for investment deals. The lending landscape became more balanced as multiple sources competed for deals. Commercial banks and CMBS issues posted the strongest yearly growth rates, taking market share from the government agencies and insurance companies.
National banks, which retreated from commercial markets in the wake of the recession, have been finding conditions favorable and re-entering the market. During 2012, national banks made up 16% of the market, a 4% increase from 2011. Regional banks also added to their portfolio of commercial real estate loans, spelling good news for properties and deals in secondary and tertiary markets. It is likely that many of the loans made by banks will end up as CMBS issues during 2013.
The CMBS market seems to have finally regained its stride. CMBS issuance was brisk during 2012, closing in on government agencies in terms of market share, at 22%. Furthermore, private label CMBS issuance totaled $30 billion during the first quarter of 2013, a noticeable jump from $48 billion during the entirety of 2012.
The increased level of competition among lenders became obvious, as government agencies and insurance companies — even with similar or higher commitments in 2012 as in 2011 — saw their market share diminish. The retail and hotel sectors found much interest in the CMBS market, as the government agencies maintain their dominant presence in the apartment market. Office properties were of interest to most lenders, while commercial banks were dominant in the industrial sector.
The bifurcation in capital availability along property values continued in 2012 and the first part of 2013. Data from Real Capital Analytics indicated that for deals valued at $2.5 million and above, CMBS issuers and government agencies remained dominant players in secondary and tertiary markets, followed by national banks, insurance companies and regional banks. Meanwhile, data from the REALTORS® Commercial Real Estate Lending Survey revealed that for transactions below the $2.0 million mark, private investors, local and regional banks continued to serve as the main conduits for capital liquidity.
Source: National Association of Realtors, George Ratiu, 2013