Real Capital Analytics has released April transaction volume figures.
The $22 billion in transactions last month marked a 34 percent decline versus the same period in 2015. I have to mention that it is virtually never advisable to look at this data on a linked-month basis due to the incongruity in the timing of large deals which can skew the comparison. That being said, April’s $22 billion marks the lowest monthly tally since January 2013 – that is a little sobering. In the below graph of monthly sales volumes I have included a polynomial trend line which unmistakably shows the multi-month decline in monthly sales. Is this trend going to be arrested by a return to normalized velocity levels 90 days after February 16 (the crescendo of volatility)? We’ll see when RCA releases May figures next month.
Still with me? Great. Good news ahead.
At a recent HFF Capital Markets Overview, we discussed the notion that an outsized decline in large deals (i.e. portfolios and entity-level transactions) are the main culprit for the reduction in volume. Does this still hold water? Revisions to previously released data show that 1Q16 volumes decline -18 percent relative to 1Q15. Within this figure, individually underwritten transactions declined only -9 percent. We can therefore infer that portfolio and entity-level trades are contributing an outsized portion of the industry’s decline.
In this regard, how does the market today compare to the previous peak of 2007? Over the past 12 months, individually underwritten deals account for ~70 percent of all trades – compared to only ~50 percent in 2007. What does this mean? Simply stated, a higher share of the transactions clearing the market place are being underwritten on an asset-by-asset basis.
Does that really sound so adverse? I don’t think so.
As the “research guy,” I would prefer a more acute focus on valuation vis-à-vis individually underwritten deals, even if it means lower volumes. And yes, I know I work for an intermediary. The REIT coverage team at JPMorgan agrees writing, “the decline in overall activity is driven largely by a slowing in megadeals, which has a more muted impact on the larger public brokers that have a diversified revenue base across most deal price points.” As HFF recently reported to its shareholders, the firm’s market share rose significantly in 1Q16 as our investment sales practice recorded significant increases in volume across virtually all property types, compared to the broad decline at an industry level.
So volumes are down. But at least we can say we are capturing market share. Is there any other good news? As I promised, yes there certainly is.
Helping to offset this lower velocity is resilient asset pricing. Working against the company’s own Commercial Property Price Index (CPPI), RCA reported an all-time low in capitalization rates in April 2016. Measuring 6.17 percent across all property types, cap rates declined modestly in April, ostensibly driven by lower benchmark interest rates and improving credit dynamics across several lender types.
Specific property type analysis is included in a table below for the quants. There is a lot of capital chasing fewer investment opportunities.
Until next month.
Sources: HFF Research, Real Capital Analytics, Moody’s, JPMorgan
Mr. Hinton serves as managing director of HFF, responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.
During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.