Economists' Outlook

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Commercial Investments Advance 26% in Third Quarter 2013

While the summer season was in full swing, economic performance during the third quarter of the year accelerated, based on initial estimates from the Bureau of Economic Analysis. The main measure of economic activity—gross domestic product—rose at an annual rate of 2.9 percent. The boost came from upward inventory adjustments. Consumer spending was positive, buoyed by spending on travel and leisure, recreation and home purchases and furnishing. Business spending was cautious, as the specter of a government shutdown loomed large. Net exports were positive to the tune of $44.8 billion for the quarter. And with stronger balance sheets, state and local governments upped their spending, overcoming the federal government’s negative contribution to GDP.

Against this background, commercial properties notched another upbeat quarter. Sales of major properties (over $2.5M) advanced 26 percent on a yearly basis during the third quarter of this year, totaling $89.7 billion, based on Real Capital Analytics (RCA) data. Several property types attracted stellar investor interest, registering double- or triple-digit growth rates. Sales of retail assets rose 104 percent from the same period in 2012, while industrial sales volume advanced 70 percent.

Based on National Association of REALTORS® data, sales of properties at the lower end of the price range (mostly below $2.5 million) increased 11 percent on a yearly basis. Based on three quarters worth of data, total sales volume is expected to surpass 2012’s $300 billion.

Portfolio sales contributed a major portion to the total sales volume during the quarter, accounting for $30.2 billion. Blackstone was involved in two major portfolio transactions, one for apartments and the other for industrial properties, totaling over $3.1 billion. Sprint Realty Capital spent $7.7 billion on a portfolio of mixed properties. On the individual property side, office transactions dominated the market for top properties. The building at 650 Madison Avenue in New York sold for $1.3 billion in the third quarter, taking the top spot. It was followed by a couple of office properties in Los Angeles, City National Plaza and One Wilshire, which traded for $858 million and $439 million, respectively.

As demand for properties grew, prices rose 9.3 percent in the third quarter, according to RCA’s Commercial Property Price Index. Apartments continued to be the clear winners, as prices advanced 14 percent. The average apartment unit price reached $107,240. Retail properties witnessed a 12 percent price appreciation, trading for an average $170 per square foot. Prices for office buildings gained 9 percent, changing hands for an average of $233 per square foot. Industrial properties posted average prices of $65 per square foot, a 1 percent decline from a year ago.

Cap rates inched up 7 basis points, to an average 6.8 percent nationally across all property types, based on RCA data. For lower priced properties (below $2.5M), prices increased 4 percent year-over-year, based on survey data from the National Association of REALTORS®, while cap rates increased 50 basis points to an average 9.2 percent.

As asset values rose, new commercial distress continued on a downward trend. New distress in the third quarter accounted for $2.5 billion, a 30 percent decline from the same period in 2012.

For the full Commercial Real Estate Outlook report, visit

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