U.S. Investment Activity Outperforms The First Half Of The Year, But A Slowdown Is Still Expected
Though the economic cycle has grown long in the tooth, favorable commercial real estate fundamentals continue to fuel investment activity among institutional players in search of scale and yield.
“We continue to see investors pursuing yield. An uptick in opportunities drove U.S. real estate transaction volumes to exceed expectations in the first half of 2018,” JLL Director of Americas Research Lauro Ferroni said. “Pockets of the market are seeing exceptional manifestations of liquidity with investors in pursuit of scale and market share.”
U.S. deal volume increased 3.4% year over year in the first half of the year to $194.9B, according to JLL’s H1 2018 U.S. Investment Outlook report. This level of activity was largely unexpected for the year, and JLL foresees a 5% slowdown in transaction volume by year-end.
Increased headwinds have put downward pressure on investors’ ability to source and close deals at a fast clip. Rising interest rates, mediocre yields and waves of new supply in select markets are softening investor sentiment regarding certain deals. Increased competition from institutional investors with hundreds of billions of dollars in dry powder on the books is also expected to dampen deal volume. Still, there is money on the sidelines aching to get into real estate. As of H1, roughly $178B of dry powder had yet to be deployed, JLL reports.
“Notwithstanding the low-yield environment, we expect investors to remain bullish on real estate for the remainder of the year as fundamentals remain strong and the economy continues to expand,” Ferroni said.
Take a look at key investment metrics and fundamentals for the core five sectors so far this year, according to data from JLL’s H1 2018 report.
H1 Transactions: $66.2B
% Change: 10.2%
Robust demand from renters in search of cost-efficient living arrangements in secondary markets resulted in healthy multifamily rent growth in the first half of the year. Rental growth increased 2.4% annually as of midyear as supply rose. So far this year, roughly 183,000 units have delivered nationwide, according to JLL, with total new supply expected to hit 373,000 units by year’s end. After roughly six years of record-breaking apartment completions, JLL anticipates new deliveries will slow by 17.4% in 2019.
Though apartment investment and transactions were down in Q2 to $32.6B compared to the previous quarter, the sector continues to outperform on an annual basis, accounting for roughly 34% of all U.S. commercial real estate transactions in the first half of the year, JLL reports.
H1 Transactions: $54.4B
% Change: -12.9%
The office sector experienced the biggest decline in transaction volume of all five sectors in the first half of the year, which JLL attributes largely to the low-yield environment and investors’ increased scrutiny of “best-in-class-assets.”
“This is impacting liquidity and pricing for core transactions. Investors are demonstrating an increasing preference for new-build offices in transactions of scale globally and domestically, reflective of the emerging ‘flight to quality,’” JLL reports.
Nationwide office rental growth increased 2.3% in the first half of 2018 and vacancies increased 10 basis points, JLL reports. Central business district rents in particular have remained largely flat these past three quarters. That said, JLL does expect large, single-asset office deals to fuel a rebound in transaction volume later in the year.
H1 Transactions: $28.7B
% Change: -3.6%
Retail is one of two sectors that experienced a year-over-year decline in investment activity in H1, though large portfolio deals like Unibail-Rodamco’s $16B acquisition of Westfield prevented deal volume from taking a sharp plummet.
Though the sector continues to suffer from retailer bankruptcies and store closures, some believe its strong fundamentals in certain coastal markets, lack of new supply and steady absorption rate could bode well for retail transactions in the second half of the year. The backfilling of vacant space by e-commerce players, innovative pop-ups and experiential concepts has also made investors less wary of the sector.
Grocery-anchored centers, in particular, are stable, and demand for these assets continues to outpace supply. Cushman & Wakefield reports that neighborhood grocery-anchored properties accounted for the majority of Q2 retail absorption, with tenants occupying 3.7M SF during the quarter.
H1 Transactions: $30.5B
% Change: 18.3%
Unsurprisingly, industrial experienced the second-largest jump in transaction volume of its peers, JLL reports. Investors’ appetite for industrial assets — namely warehouse and distribution centers — is being fueled by e-commerce players’ need for facilities close to densely populated city centers.
Core industrial markets like Inland Empire, Chicago, Atlanta and Dallas-Fort Worth continue to outperform in terms of absorption and rental rates, according to Colliers International’s Q2 Industrial report. Nationwide vacancies dropped 5% in spite of a tsunami of new supply that hit the market during the quarter — roughly 64M SF. Colliers does anticipate some headwinds hitting the sector, such as the tight labor market making it increasingly difficult for operators to find qualified talent to work at their modern facilities.
H1 Transactions: $15.1B
% Change: 44%
Hotel investment rebounded in the first half of the year thanks to a large swath of portfolio deals transacted during the period, including GIC Real Estate’s three-property portfolio sale to investment giant Blackstone Group for $1.63B, JLL reports. Portfolio deals increased a whopping 220% during the first six months of the year, while single-asset sales accounted for $8.8B of transaction volume.
Increased demand from both foreign and domestic travelers is benefiting the sector. All three key performance indicators increased in the first half of the year compared to the year prior — occupancy growth experienced a 1% uptick, averaged daily rents advanced 2.3% and revenue per available room was up 3.3%. Hotel researcher STR reported the sector experienced its 100th consecutive month of RevPAR growth in July.
