Commercial real estate companies rebounding nationally as capital diversifies

Posted on July 18, 2013

As fundamentals improve, sales of commercial properties have increased to healthy levels with investor interest gaining momentum and gravitating toward robust commercial appraisals.

According to the 2013 Quarterly Market Trends report, compiled mutually by the Certified Commercial Investment Member Institute (CCIM) and the National Association of Realtors, confident spending among individuals and businesses are increasing manufacturing and demand for retail and commercial space.

“Given the positive increases in demand and steady economic performances, commercial fundamentals will likely stay the recovery course,” said George Ratiu, manager of NAR’s quantitative and commercial research. “With demand for rental housing projected to remain strong and moderate gains in employment and consumer spending, absorption for office, industrial and retail spaces will continue rising, pushing vacancy rates lower.”

For example, the report revealed demand for office space was evident with a 2.6 percent increase in rent and a dropping vacancy rate of 15.7 percent. With 63 percent of CCIM members reporting optimism regarding credit conditions, saying that financing expected to improve, the pace of transaction activity will likely follow. The first quarter alone saw a 37 percent year-over-year increase in major property sales, hitting $74.2 billion, according to Real Capital Analytics. And NAR data indicated a 5 percent yearly increase in sales of properties valued under $2.5 million.

Commercial property is major markets has also experienced a similar improvement to sales price as the housing market. Moody’/Real Capital Analytics Commercial Property Price index improved by 6.4 percent during the first quarter, influenced greatly by gains in the multifamily and office sectors.

Availability of financing
For properties valued at more than $2.5 million, capital has become more available. As capital sources diversify, national banks have reentered the commercial investment space. Private sources of capital, such as equity funds and institutional investors, have followed suit, making up 35 percent of all deals. Real estate investment trusts (REITs) contributed an additional 32 percent of market activity while 16 percent came from equity funds. Foreign money accounted for nearly 9 percent of all activity, as Chinese investors dig in throughout U.S. markets.

Based on NAR data, capital availability, while loosening, remains constrained to higher valued properties. Secondary and tertiary markets are mostly effected, as 38 percent of all markets reported less-than-ideal financing availability. Local banks contribute the bulk of the financing for these smaller market deals, accounting for 42 percent of investment capital. More than 52 percent of sales failed because adequate financing couldn’t be secured.