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Commercial Real Estate Market Bounces Back In Q2 2019 After First Quarter Slowdown

Ten X Commercial, Summer Commercial Real Estate Volume & Pricing Trends Report, Situs, RERC, Peter Muoio
Graphs Courtesy of Ten X Commercial

IRVINE, Calif. and SILICON VALLEY, Calif., Sept. 19, 2019 – Ten-X Commercial, the nation’s leading transaction platform powering 90% of all online commercial real estate sales, today released its Summer Commercial Real Estate Volume & Pricing Trends report. The analysis, which included data from the first two quarters of 2019, found that while Q1 2019 experienced a slowdown in deals, there was recovery in Q2.

With deals totaling $30 billion, strong M&A activity created a surge in the CRE market in the second half of 2018. However, industry M&A slowed in the first half of 2019, where deals totaled just $2.2 billion – almost $28 billion less than the latter half of last year. This lack of M&A activity resulted in a slow Q1, which slightly rebounded in Q2 2019.

According to RCA, total second quarter deal volume rose 10% year-over-year and saw an increase of 24% from Q1, bringing Q2 CRE deal volume to $136.8 billion.

Of the five CRE sectors – apartment, office, retail, hotel, and industrial – only apartment and office showed an increase in deal volume, growing 19% and 29% year-over-year, respectively. Combined, these two sectors attributed to more than 15% of the total five-sector deal volume of $80.7 billion.

While the industrial and retail sectors each saw a decline in deal volume, the hotel sector was hit the hardest, decreasing 38.5% from last year – marking its six year low.

“A slowdown in the previously thriving M&A market prompted cooling in total Q1 2019 CRE transaction volume,” said Ten-X Chief Economist Peter Muoio. “However, there was a resurgence in the second quarter of the year with the apartment sector leading the way in overall deal volume, totaling more than $43 billion in the second quarter.”

CRE Pricing Growth Remains Stagnant In 2019 
Despite remaining at its highest levels since 2017, the growth of pricing amongst all five CRE sectors has plateaued.

According to the August Ten-X All Property Nowcast, which gauges CRE property valuations on a contemporaneous basis using Google trends, proprietary data from transactions on the Ten-X’s platform, and survey data done in conjunction with Situs/RERC, overall CRE pricing stands just 0.1% below its level from last year. Although small, this demonstrates the first annual decline since mid-2018.

A sector-by-sector examination also showed lackluster pricing changes across all sectors. In August, hotel pricing increased just 0.2% from July, its weakest long-term trajectory and a 1.8% year-over-year decline. Retail property pricing also declined 0.3% year-over-year amid a 0.5% increase from the month prior. 

The office sector experienced some gains, as pricing increased for the second consecutive time in August. However, as work trends change and factors such as working remotely continue to become more prevalent, the office sector will struggle.

Industrial property pricing has seen some improvements as the sector showed a 0.6% year-over-year increase. Though this is the strongest annual gain since 2017, pricing did fall 0.3% from the month prior.

“Property pricing among all CRE segments is at a virtual standstill,” Muoio continued. “This is for a variety of reasons, with the trade war with China and escalating tariffs that affect the industrial sector and the recent yield curve inversion sparking fears of a recession and spooking investor sentiment across all CRE segments, key factors.”

The sturdiest sector of the five is apartment. Despite a 0.3% decline from July to August, apartment pricing has increased 0.9% from August 2018. Of all the CRE sectors, apartment pricing feels the least impact by tech-driven space use changes.

While student loans continue to burden Americans and have resulted in many recent college graduates living at their childhood homes, a healthy economy and job growth have allowed this demographic to move out faster than in recent years. When they do leave home, the vast majority are choosing to rent apartments over purchasing homes, positively affecting the apartment sector overall. 


In July, amid a still strong economy, the Federal Reserve lowered interest rates for the first time in a decade. As a result, cap rates have stabilized and have remained unchanged since Q1 2019.

According to Situs/RERC however, the industrial sector showed the largest quarterly change, declining by 30 bps from Q1 2019 to Q2 2019. Office and apartment cap rates also each saw a 10 bps decline from the previous quarter. The retail sector experienced no quarterly cap rate change, remaining at 6.4%.

The hotel sector was the outlier, showing a 10 bps cap rate increase in the second quarter of the year – the only sector to show any rise as interest rates fell.

“Despite the decline in interest rates cap rates are holding fast, suggesting cap rate spreads are on the rise,” Muoio continued. “Cap rate spreads have widened in the past few quarters, reflecting worsening investor sentiment across CRE. This is likely due to the uncertainty brought on by the US-China trade war and recent yield curve inversion, which has increased investor unease for a potential recession.”

With the exception of the industrial sector which remained unchanged, cap rate spreads widened in the first two quarters of the year and are close to their 10-year averages. Retail spreads increased 30 bps, hotel spreads increased 40 bps, and office and apartment spreads rose 20 bps each.

The Multifamily Sector: Strong Q3 Finish with Deals Selling Far Beyond Reserve 

While cap rate spreads continued to expand, investor sentiment remained relatively positive in the multifamily sector. Most recently, the Ten-X Apartment Nowcast showed that apartment pricing has the best trend among the five major property segments. This is in large part to millennials moving into apartments from their childhood homes.

Ten-X platform data shows that since February 2019, Multifamily Property Display Page views are increasing after stagnating for the past few months. Vault visitors have also remained steady at a high level from its rise in the first quarter of 2019.

Data from Ten-X showed the southeast is a clear standout in multifamily asset sales, resulting in 51.6% of total multifamily sales – the highest percentage across the US. Additionally, properties in the southeast generated $65.63 million dollars in transaction volume on the platform since the start of 2018.

The Midwest also saw a sizeable percentage of multifamily transactions, with the region comprising about 22% of multifamily asset sales on the Ten-X Platform with total sales volume equaling $17.99 million. In contrast, the northeast had the lowest proportion of deal volume at 10.9%, in addition to the smallest share of total sales, which were $13.3 million. Meanwhile, the southwest measured at 15.6% of deal volume and total sales of $34.05 million.

Two of the biggest successes for the multifamily sector on the Ten-X platform included the sale of the Jacksonville, IL Eastlawn Apartments, which sold for six times its reserve price; and the Dellwood Apartments in Laredo, TX – purchased for three times its reserve price. Both sales are demonstrative of the positive investor sentiment for multifamily assets.

“Unlike other sectors falling victim to changing technologies and trends, multifamily remains largely unaffected by such major structural changes to space usage,” Muoio continued. “Apartments provide individuals with an increasingly desirable option to rent over own, allowing for a flexible lifestyle which many young people crave. These lifestyle shifts have investors keen on these types of properties.”

Despite a 0.3% monthly decline from July, Ten-X Apartment Nowcast pricing has the best trend among the five major property segments. Even with August’s setback, apartment pricing is up 0.9% from last year. However, when compared with the stronger advances posted in recent months, this pricing is indicative of slowing pricing gains. Investors remain keenly interested in multifamily properties, as indicated by strong trends in searches on the Ten-X Commercial website. Compared to other segments, multifamily has seen the least impact from technological shifts in space usage and has benefited from lifestyle shifts that have favored renting over owning and the flexibility that renting provides in the event of shifts in the economy. Apartment property pricing was weakest in the Northeast in August and on a longer-term trend basis.

About Ten-X Commercial

Ten-X Commercial is the leading end-to-end transaction platform for commercial real estate, powering more than 90% of all online CRE sales. Our platform empowers brokers, sellers and buyers with data-driven technology and comprehensive transaction tools to expand market visibility and decrease time to close. Ten-X Commercial is headquartered in Irvine and Silicon Valley, Calif., with offices in key markets nationwide. Investors in the company include Thomas H. Lee Partners, L.P., CapitalG (formerly Google Capital) and Stone Point Capital.

Ten X Commercial, Summer Commercial Real Estate Volume & Pricing Trends Report, Situs, RERC, Peter Muoio
Graphs Courtesy of Ten X Commercial