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Signs of Caution Creeped into the Investment Sales Market in the Second Quarter

Year-over-year sales volume was up, but investors may be pulling the reins in on new acquisitions amid high pricing and global uncertainty.

Investment sales volume of U.S. commercial properties grew by 14 percent year-over-year in the second quarter of 2019, to approximately $130 billion, according to research firm CoStar Group. But industry sources say a slowdown may be coming.

Global economic uncertainty and record high asset valuations are contributing to a slowdown in commercial real estate fundraising in the private equity sector, likely a leading indicator of a near-term slowdown in investment sales, according to Robin Trantham, consultant at CoStar. However, the longer-term strength of the U.S. real estate market should continue to prop up deal volume well above its quarterly historical average of $64 billion.

Transaction volume rebounded strongly in the second quarter, following a slow start to 2019. According to data from CBRE Capital Markets, total deal volume in the second quarter came to $121.5 billion, a 16.8 percent increase from the first quarter and a 3.4 percent year-over-year increase.

CoStar Group reported a 30 percent increase quarter-over-quarter.

According to a July 2019 report from research firm Real Capital Analytics (RCA), however, deal activity fell on a year-over-year basis for every property type. That’s because of growing uncertainty in the broader economy.

Investors remain willing to make acquisitions, but some are planning to place less capital in real estate in the coming year than they did in the prior 12 months, according to Trantham.

Investment sales volume in the office sector increased by 30.5 percent in the second quarter, the largest increase among major property types. The multifamily sector came in second, with a 20.6 percent increase, according to CBRE data.

Total sales volume decreased in the industrial sector, but volume for stand-alone industrial asset sales volume was up by 2.7 percent year-over-year. Sales of stand-alone assets in retail and hotel sectors both decreased by a smaller amount than overall volumes, according to CBRE.

Overall, the volume of individual asset sales increased by 9.3 percent to $91.2 billion in the second quarter, the highest second quarter total since at least 2004, reports CBRE. The volume of entity-level deals picked up in the second quarter, but remained well below levels seen in 2018, when they were a major driver of total transaction volume. Less than $4 billion in entity-level deals closed in the second quarter of this year, down 53.2 percent year-over-year and significantly below the nearly $30 billion in entity-level deals closed in the third and fourth quarters in 2018.

Another notable trend in the second quarter was that foreign investors became net sellers of real estate for the first time in seven years, flashing a “warning sign,” according to CBRE. However, the flashing sign is “more of a yellow light than a red,” according to a second quarter RCA report on U.S. cross-border investment trends.

Cross-border investment sales volume in the 12 months ending in the second quarter of 2019 totaled around $79 billion, down from recent highs, but still a healthy level of activity, according to RCA research. Cross-border volume in the second quarter totaled only $12.6 billion, down 37 percent from the second quarter of 2018.

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