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Cap Rates Fall on Higher U.S. CRE Transaction Volume

Murray, Michael
Commercial real estate sales volume increased last year to $112.5 billion in the United States, pushing cap rates down, said Real Capital Analytics, New York.

“The Americas, driven by a solid rebound in the U.S. markets, also experienced significantly more cap rate compression than EMEA [Europe, Middle East and Africa] and Asia [Pacific], where average property yields have stabilized and moved little in recent quarters,” RCA said in its January Global Capital Trends report.

RCA reported average cap rates for U.S. commercial properties ended the year at 7.4 percent after a decline of at least 100 [basis points] from a peak in late 2009.

U.S. “gateway cities” accounted for more than one-third of sales volume. The U.S. held 12 of the 30 most active CRE markets in the world last year, up from seven in 2009, including the third-ranked New York City metropolitan area; the Washington, D.C., metro area, ranked sixth; and Los Angeles and San Francisco metros, ranked seventh and eighth, respectively.

“The U.S. was responsible for nearly 83 percent of the Americas' transaction activity, versus 12 percent for Canada and 6 percent for Latin America, although all areas experienced consecutive increases to quarterly volume and robust growth for the year,” RCA said.

New York City sales volume increased nearly 200 percent for the year with $16.3 billion. Sales in Washington, D.C., increased 156 percent to $12 billion, while Los Angeles jumped 116 percent to $9.7 billion and San Francisco metro rose 208 percent to $8.6 billion.

The top 30 global markets included Chicago, South Florida, Boston, Dallas, Houston, Atlanta, San Diego and Seattle.

“Growth in the U.S. was not only evident in the strong showings by two Texas markets as well as major metros in the Northeast and West, but also in the positive growth in markets with heavy ratios of distressed assets, such as South Florida up 169 percent; Atlanta, up 74 percent and Phoenix, up 98 percent,” the report said.

Office properties had the highest sales volume last year in the Americas, $42.325 billion, followed by apartment sales at $29.785 billion, retail sales at $21.87 billion and industrial at $17.113 billion.

“Reflecting keen investor demand for major urban properties, yields for CBD [central business district] office towers in the U.S. plummeted by over 200 bps,” RCA reported. “Much of this turnaround in the U.S. was fueled by significant improvements in the availability of credit, including the rebirth of CMBS [commercial mortgage-backed securities], combined with low interest rates.”

New York City metro office sales were highest at $8.491 billion, followed by Washington's $5.575 billion in sales and San Francisco at $4.251 billion. Los Angeles and Chicago each had more than $2.5 billion in office sales with Boston at more than $1.9 billion, Houston at more than $1.5 billion and Seattle at nearly $1.3 billion.

“Yields for office transactions in major CBD markets illustrate the remarkable improvements achieved over 2010 but also underscore the differences in pricing that have emerged between the top markets and all others,” the report said. “By year-end, Manhattan's 5.5 percent average yield was nearly 100 bps beneath that for other top U.S. markets such as San Francisco and Washington, D.C., with another 75 bps separating those markets from most markets in Canada and the U.S.”

Apartment sales volume in Washington, D.C.'s metro area was highest among all U.S. cities at $3.867 billion, followed by New York's metro at $3.717 billion and Los Angeles' metro at $2.551 billion. South Florida, Dallas, Houston, Phoenix and San Francisco accounted for nearly $6.3 billion in apartment sales last year.

“As intense competition has bid yields low in these top markets, investors are increasingly looking to either other property types or secondary markets for higher returns,” the report said.

RCA said the U.S. apartment and industrial sectors “witnessed significant [year-over-year] growth” while the retail sector lagged.

Los Angeles had the highest industrial and retail sales volume at $2.162 billion and $1.41 billion, respectively. Hotel sales volume in NewYork City was highest at $1.928 billion, followed by San Francisco's $1.052 billion.

RCA said institutional investors, including equity funds, returned to the U.S. at the end of last year and they continue “disposing of assets at an elevated level that has not eased” while the share of private investor acquisitions trend down.

However, RCA noted that the private sector relies more on leverage and recent improvements in availability of commercial mortgages and continued CMBS market expansion “should enable the private sector to recapture some of its market share in 2011.”