Economists' Outlook

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February 2011 Real Estate Insights: "Commercial Investment Looking Up"

While the commercial real estate market still faces challenges, last year ended on a high note for commercial investors. In fact, investment in U.S. commercial real estate increased a whopping 120% in 2010. George Ratiu, NAR Research Economist, provides us with an overview of commercial investment activity.

Commercial Real Estate Investment: Up in 2010, but Gains Unevenly Distributed

Market Overview

Despite doubts about the economic recovery, fears of a double-dip recession and a second round of quantitative easing by the Federal Reserve, commercial real estate ended 2010 on an upbeat note. The latest data from Real Capital Analytics show that during 2010, slightly more than 6,000 major properties traded hands, totaling $120.0 billion in sales. In fact, investment in commercial real estate increased with each successive quarter last year: from $15.8 billion in sales during the first quarter of 2010, to $21.8 billion in the second quarter, $31.7 billion in the third quarter and $50.8 billion in the final quarter. The annual figure represents a 120 percent increase from the decade-low $54.6 billion in 2009.

The significant shift in commercial investment activity came amid increased availability of capital at the high end and changing preferences of global investors. With corporate profits at record highs and private funds aiming for stability of capital more than just returns, investors turned to stable markets and top tier properties. In addition, with steady growth in the U.S. economy, major economic centers like Washington, D.C., New York, Boston and San Francisco became attractive alternatives to other major international gateway city markets.


While certain property types continued to struggle with weak fundamentals and high vacancies, apartments were a clear exception. Absorption improved steadily throughout 2010, vacancies declined and rents increased. In markets with stronger economies and low unemployment, like the Washington, D.C. metro area, rents breached double-digit increases during the year.

Not surprisingly, investors found the sector an attractive target. Sales of apartments totaled $30.6 billion for the year, a 107 percent increase from 2009. Of the almost 1,500 properties that traded hands, 66 percent were garden-style apartments. Prices for apartment properties also increased by 31 percent for both garden and mid/high-rise properties: the average price per unit was $111,335. Meanwhile, cap rates declined during 2010, closing the year at an average 6.7 percent (compared with 7.0 percent in 2009).


The office market was the other major sector that garnered significant investor interest last year. Once again, markets where the unemployment rate remained low relative to the national average and where economies remained stable were attractive to both domestic and international investors. Sales of office buildings totaled $40.3 billion in 2010, a 152 percent jump from the sales total in 2009. Investments were evenly split between those in central business districts and suburban properties. In keeping with the trend for the year, prices for office properties also rose – up 15.3 percent from the previous year to an average $214 per square foot. Cap rates declined from 8.3 percent in 2009 to 7.5 percent in 2010.

Industrial and Retail

Along with office and apartment properties, the industrial and retail segments also posted double-digit gains in sales. Warehouses led the way among industrial properties with $10.9 billion in sales, and flex buildings closed $5.2 billion in property sales, driving total industrial sales up 95 percent over the level in 2009. Due to declining prices for warehouses, the industrial sector was the only one among all commercial property types that experienced no increase in average prices for the year. Cap rates for industrial properties declined from 8.5 percent in 2009 to 8.3 percent in 2010.

Meanwhile, retail properties closed 2010 with $19.8 billion in sales, driven by investor interest in strip centers which accounted for 58 percent of those sales. Average prices for retail buildings increased 9.1 percent in 2010, to an average $159 per square foot. Cap rates for retail were unchanged from the previous year – at 7.9 percent.


After the severe decline in the hotel sector during 2009, last year saw a slight rebound. Coupled with a large number of distressed properties entering the market at attractive prices, investors found hotel properties to be great value propositions. As a result, sales of hotels jumped 427 percent in 2010, with full-service properties accounting for the bulk of the sales volume. In a telling sign, prices also increased 66 percent, to an average $161,751 per unit, while cap rates declined noticeably from 9.1 percentin 2009 to 6.6 percent in 2010.

REALTOR® Markets

Commercial REALTORS® had a challenging and difficult 2010. In contrast to the broader markets, investment sales and prices declined throughout the first half of the year for commercial REALTORS®. During the year, about 40 percent of commercial practitioners reported no sales transactions. However, sales flattened out in the latter half. By the fourth quarter, 64 percent of commercial REALTORS® had completed a sales transaction. Sales of commercial properties were up 0.8 percent compared with the previous year. During the same period, prices declined 16 percent. The estimated average transaction value during the fourth quarter reached $1.3 million. Meanwhile, 69 percent of all sales involved properties with a value of $1 million or less.

The main culprit for the slow pace of transactions was available credit. In sharp contrast with major properties in large metropolitan areas, a significant number of REALTORS® handle properties in smaller cities where financing is handled by local and regional banks. Following the credit tightening of the past two and a half years, many potential buyers and small businesses have been struggling to secure financing.

Going forward

Looking ahead at this year, commercial real estate is expected to continue on a moderate growth path. As capital from both domestic and global investors enters the markets, it should disperse in a wider geographic pattern. Furthermore, as the economy strengthens and grows, the performance of underlying assets should boost values and, in turn, lead to increased capital liquidity across allproperty types.

For more information

The REALTORS® Commercial Real Estate Market Survey is a quarterly project from NAR Research that measures activity in the commercial real estate markets. The survey collects data from commercial REALTORS®, and is designed to provide members with an overview of the market performance, sales and rental transactions, current economic challenges and future expectations. To read the report, visit Also available on the web site is a short video highlighting findings of the report.

This commentary is taken from the February 2011 edition of Real Estate Insights. To read the full February Issue of REI, click here.

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