Research - OCTOBER 10, 2018

Continuing U.S. economic expansion tempts more capital into CRE

by Andrea Zander

Led by multifamily and industrial investments and buoyed by a 44 percent increase in hotel sales, U.S. commercial real estate transaction volume exceeded expectations in the first half of the year, with closed purchases increasing 3.4 percent to reach $194.9 billion, according to JLL Capital Markets research.

“As the cycle continues to press on, investors are displaying appetite for the commercial real estate sector,” said Sean Coghlan, JLL senior director of investor research, Americas. “Pockets of the market are seeing exceptional manifestations of liquidity with investors in pursuit of scale and market share. With the economic outlook and commercial real estate fundamentals remaining favorable, we now expect volumes to be down just 5 percent year-over-year.”

The strong first-half showing means that transaction volume for 2018 is likely to be higher than many observers expected at the beginning of the year. Transaction volume last year was down 8 percent over 2016.

Competition for deals is strong and liquidity is high

The research also shows that investors continue to raise more funds allocated to real estate, even though it is becoming increasingly difficult to deploy capital in what has become a lower-yielding market overall. Funds raised but not yet invested in real estate assets were up nearly 18 percent in the first six months of the year, creating a record-breaking “dry powder” chest for investors of $178 billion. This compares to roughly $80 billion in investable capital that was on the sidelines in 2012, at the earlier stages of the current cycle.

Among funds raised in the first half, high-return strategies such as value-added and opportunistic dominated with 72 percent of investors’ capital. Debt funds accounted for just over 12 percent of total funds raised with other strategies, such as core and core-plus, accounting for less than 7 percent.

Multifamily sector accounts for greatest amount of transactions

Among property types favored by investors in the first half, multifamily assets continued to be the most popular with $66.2 billion in transaction volume and the sector seeing a more than 10 percent increase in transaction activity over the first half of 2017. The hotel sector saw the highest growth rate in liquidity, at 44 percent.

Industrial assets saw an 18.3 percent increase in transaction activity with $30.5 billion traded. For office assets, the first half of 2018 saw $54.4 billion in transactions, representing a year-over-year decrease of 12.9 percent. Underpinned by entity-level trades, retail transaction volumes marked a lesser decline in first-half 2018 than in recent periods, and the asset type notched $28.7 billion in trades.

U.S. remains leading recipient of cross-border capital

The percentage of U.S. transaction activity attributable to offshore investors has declined since reaching its cyclical peak in 2015, but the dollar volume of cross-border activity held steady in the first half of 2018.

Added Jonathan Geanakos, JLL president of capital markets, Americas, “Foreign investors continue to regard the United States as the top landing spot for investment. Their commitment to the United States speaks volumes about the health of our real estate sector and economy, and we expect this to remain the case as the cycle progresses.”

The office sector, while remaining the largest recipient of cross-border capital of the property types, saw a decline in cross-border buys driven by the low-yield environment in primary markets and hedging costs impacting outbound investors from selected Asian countries. At the same time, cross-border activity in the retail sector was propped up notably due to Unibail-Rodamco’s acquisition of Westfield.


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