Total U.S. Commercial Investment Transactions Top $160 Billion in 2011, Up 44% Over 2010
According to Jones Lang LaSalle's Capital Markets Outlook, preliminary investment transaction volume in the U.S., which includes office, industrial, retail and multifamily transactions, was up 44 percent to $160 billion for 2011.
In addition, Jones Lang LaSalle believes transaction volume growth trends will continue throughout 2012, but at a slower year-over-year growth rate when compared to 2010 and 2011.
"While total investment activity in 2012 is projected to increase 15-20 percent over our preliminary December estimate for 2011 volume of $160 billion, this does represent a slowing of growth from the estimated 44 percent increase in 2011. For 2010, total investment volume grew 117 percent, but driven largely by a historically anemic 2009 transaction volume base," said Jay Koster, President of Jones Lang LaSalle's Capital Markets group in the Americas. "Investors entered the year feeling stronger about the market and they began putting capital aggressively into real estate in the first-half of 2011. A variety of well known circumstances tempered the mood entering the third quarter, pulling total investment volume back to a more tepid recovery pace."
There are two primary factors that influenced a slower growth rate in 2011, and will temper some activity in 2012: increased investor caution driven by continuing global economic uncertainty, and a tougher debt market driven by retrenchment in the CMBS market recovery.
"Investors remain concerned about jumping into greater perceived risk positions associated with assets that have higher vacancies, need repositioning and capital improvements or are located in secondary/tertiary markets, and we need active participation by investors across all risk categories to see a well functioning, fully recovering market," added Koster.
Tom Fish, Co-head and Executive Managing Director of Jones Lang LaSalle's Capital Markets Real Estate Investment Banking business added, "We remain optimistic about the continuing improvement in the CMBS industry in spite of the slowdown in the third and fourth quarter. The market volatility caused by the European debt crisis has impacted pricing, which makes it even more difficult to predict. However, the demand for properly priced and underwritten CMBS paper remains very strong. It will remain a more difficult process to close CMBS transactions compared with life companies, but we expect it to continue to be a viable source of financing."
Those investors who have capital willingness to invest are flocking to core product. In the office sector, investors continue to be most interested in the top-tier investment markets. Office investment volume market share for the core gateway markets has increased to 60 percent as of the third quarter, versus a longer-term average of 51 percent. Conversely, tertiary markets are currently garnering historically very low office investment market share, ranging from just 2-3 percent of all office volume in recent quarters.
The CBDs are also earning an 11+ year high market share of transactions versus suburban markets, as CBDs have been outperforming suburbs (nationally, on average) in market fundamentals in a fairly well-entrenched trend.
"Although on a less-steep trajectory than in 2010 and in 2011, investors will apply some downward pressure on core cap rates because of a deficiency in attractive yield alternatives and continued historically low yields on U.S. government bonds," Koster predicts. "Furthermore, debt financing will remain very strong in the core space from life companies and domestic banks and we expect the CMBS market to continue to regain footing in 2012."