July was the second most active month in commercial property sales this year, according to a Real Capital Analytics
(RCA) report released today. Sales totaled $7.8bn, almost double the volume of July 2009 commercial real estate (CRE) sales.
The office and apartment sectors were the most active in July and continue to build momentum, the report finds. More than $2.8bn worth of office properties were sold last month, down 44% from June, but still a positive sign in a traditionally slow month, RCA said.
Offers on offices also surged in July to $5.8bn, the highest monthly total in two years (see chart below). This suggests that sellers are more comfortable with current pricing and are positioning for a more active second half of the year, the report said.
Office cap rates (ration between income and costs) decreased 5bps to 8% in July while the average price per square foot rose to $220 nationally. Cap rates achieved on these premium assets fell below 6% for central business district (CBD) properties and 7% for suburban.
90% of all transactions occurred in the primary market, a trend that has been growing all year. RCA reported that price differences between markets are growing, however, because these transactions are concentrated in only a few of the markets: New York, the District of Columbia, Chicago, San Francisco, Boston and Los Angeles.
Apartment sales increased for the fourth consecutive month to $2bn, the highest monthly total of 2010. Seller sentiment is high with over $3.5bn worth of apartment properties put on the market last month. Deals in the pipeline at the of July totaled $3.6bn.
Average cap rates in the apartment sector remain flat month-to-month at 6.8% while the average price per unit rose slightly to $96,500. RCA reported the average cap rates in the major market is closer to 6.3%, and for the best properties, 5%. Sales associated with distressed loans represented 28% of sales in July.
Akin to office property sales, 70% of deals occurred in the primary markets, but RCA said rebound activity in the apartment sector is not very broad-based. The New York, Washington D.C., Boston, Los Angeles, Chicago and San Francisco markets accounted for half of all apartment sales.
Retail sales fell to $767.6m in July, the second lowest monthly total of the year and the lowest by property count. Strip mall sales fell by over 50% from June. The percentage of retail assets selling out of distress was the highest of the cycle at 32% by dollar volume and 15% by property volume. Retail recap rates increased 6bps to 8.1%.
Sales of industrial properties reached the highest monthly total since December 2008, totaling $1.4bn in July. RCA said the volume reflected an isolated spike in flex property sales that was only partially offset by a 44% drop in warehouse property sales. The industrial sector’s prospects for the second half of 2010 look less certain than for other core sectors, with new offerings down in July.
55% of industrial sales were in the primary coastal markets. Cap rates for core industrial property sales were between 30 and 70bps lower than value-add properties, at 7.8% in the major metro areas. Cap rates are 8.2% for the remaining major metros and 8.8% in the secondary market.
The price per square foot for industrial properties is $176.
RCA said that the schism in prices that emerged between assets and markets across all commercial property fronts highlights an investment market that is still far from efficient.
"For investors, it presents great opportunities for those that can identify and respond to inefficiencies," the report said. "Moreover, those that can anticipate where the capital will flow next as investors move beyond core properties and major markets stand to profit handsomely."
Real Capital Analytics is a global research and consulting firm founded in 2000, with offices in New York City, San Jose, The Hague and London. The RCA report encompasses approximately $43.6bn of U.S. properties sold or in contract in 2010.Owner/Occupant acquisitions were excluded.
Write to Christine Ricciardi
Disclosure: The author holds no relevant investments.