The first half of 2018 has bucked the downward trend of US commercial property markets, although deal volume is not expected to sustain the 4% rise the market saw in the first half of the year. Colliers International US Chief Economist Andrew Nelson notes that ‘the trend since 2015 has been a gradual decline in transaction volumes, and I see that trend continuing the rest of this year into next year,’ and goes on to suggest that the commercial property market may be nearing its peak.

So what is causing this resurgence of activity, where are investors putting their money, and how will the market develop moving into 2019?

Record commercial asset prices

Overall commercial property prices rose 6.5% from H1 2017, with industrial and suburban offices up 6.5% and 6% respectively, while the pricing of apartments increased 11.6%.

A majority of markets and property types are currently at record highs, and are expected to stay for the time being with stable, moderate increases each year and little of the major price rises seen earlier in the cycle.

gray concrete buildings during golden hour

Sales volume increase over last year

The first half of 2018 was the third highest H1 in sales volume this cycle, with $236 billion in transactions. Deals worth over $25 million were up 9% over the first half of 2017.

Nelson does not regard this rise as indicative of the market reaching a turning point; however it does show that strong interest in investing in US commercial property remains.

Investment interest in multifamily and industrial assets

Industrial sales are up 26% year-on-year with almost $40 billion in assets exchanging hands due in part to the continued strength of US manufacturing, while the highest sales volume sector was multifamily assets, which saw an 8% increase in sales volume, and $70 billion in transactions.

Apartments remain the biggest sector of the market, however increasing competition among multifamily investors has led to smaller, safer, lower yield investments that could limit further growth. Assets in industrial areas and warehouses are the fastest growing market by some distance.

More focus on secondary markets

The US economy is strong and looks to stay that way for the immediate future, however key economic factors such as population growth, migration and employment growth have favoured secondary and tertiary markets over the primary markets, with particularly high demand for commercial space in university towns.

As investors seek to better balance their risk and returns in secondary and tertiary markets, secondary markets have risen 6.9% while the major metropolitan commercial property markets such as New York, Washington D.C. and San Francisco have gone up 5.6%.

Pricing in the secondary markets is still high, but remains behind the primary markets, which benefitted from faster, stronger recoveries from the 2007 crash.

Decline in CBD office and retail sales volume

CBD office prices have risen notably, but investors are not increasing what they are willing to pay to match this. Investment sales in central business district offices dropped 17%, and suburban office sales went down by 10%.

Retail saw a a very minor sales increase of less than 1%, mainly due to the Unibail-Westfield merger, but overall retail is suffering from continued weak demand and a general lack of interest in the sector.

Expect the economy to slow down in 2019-2020

Commercial real estate has been driven this year by GDP growth almost doubled to over 4% and strong economic foundations – job growth, domestic product growth and beneficial regulation and tax policies.

Growth in the commercial property sector in 2018 has been bolstered by the overall continued upswing of the US economy, and Nelson forecasts the growth to slow down over the next two years, with a corresponding decrease in property and leasing transactions.

Overall a key theme of 2018’s commercial real estate trends is caution – with the predicted slowing down of the economy over the next two years, the opportunity to capitalise on the rapid growth of the commercial may have now passed. On the other hand, commercial property prices are predicted to continue to rise at a stable rate across the board, and secondary markets, still catching up, may continue to grow while primary markets slow down.