Investors around the world are fretting over recent spikes in inflation. The OECD reported that in the G20 countries alone, the pace of inflation jumped higher than the pre-pandemic pace to an average 4.6% rate through September of 2021. Worried about the implications for their portfolios, institutional investors are turning to commercial real estate as a hedge. Real estate can outperform inflation, but not always. Inflation can distort investment decisions. Rather than focusing on the fundamentals of a project, inflation can lead investors to underwrite above-average income growth.
Global commercial real estate price growth accelerated in the third quarter of 2021, with the Asia Pacific region leading price gains, the latest _RCA CPPI Global Cities_ report shows. The RCA CPPI Global Cities Composite Index climbed 7.3% in the third quarter from a year ago, up from the 6.1% year-over-year pace seen the prior quarter and the 2.5% rate seen in the third quarter of 2020 amid the pandemic’s challenges.
With the acceleration of flexible working induced by the pandemic, investors in Asia Pacific have been watching closely to see if office prices would suffer. The pandemic did slow the increases in pricing recorded in some of the gateway cities in the region in the middle of 2020, but, in 2021 pricing in most markets has resumed an upward trajectory. For five of the eight cities shown in the chart, prices have now reached levels higher than those just before the pandemic.
The headline rate of U.S. property price growth accelerated further in September, propelled by faster rates of growth from all four major property types, the latest _RCA CPPI: US_ report shows. The RCA CPPI National All-Property Index rose 16.1% from a year ago and 2.2% from August. The office sector index accelerated to a record 16.9% year-over-year rate in September, overtaking apartment and on par with the industrial sector. Suburban office prices powered the gain, climbing 20.2% year-over-year. CBD office prices fell 1.2%.
Germany’s office transaction market has picked up momentum through the spring and summer, with deal activity for the first eight months of the year now on par with the average for the five years before the pandemic. The second quarter of 2021 was the ninth best quarter on record for office transaction volume. Investors spent €8.4 billion ($9.7 billion) in the quarter and another €3.8 billion over the normally quiet summer months of July and August.
Student housing investment volume in the U.S. reached $1.7 billion in the second quarter of 2021. While this level represents a high-triple-digit rate of increase compared with the same period a year ago, it is still 12% below the average level for a second quarter between 2017 and 2019. Sales of student housing assets had ground to a halt in Q2 2020 amid Covid-19 disruption to the commercial real estate market and as universities and students across the U.S. pivoted to remote learning.
Investment in commercial property outside London has set a new record for the first nine months of the year, powered by investor demand for industrial assets. U.K. regional property sales volume reached £27.7 billion ($37.6 billion) in the year through September, a 22% increase on the average January-to-September period in the five years prior to Covid. Compared to 2020, transaction volume is up nearly 60% year to date.
The infamous dot plot from the Federal Reserve meeting last week suggests an expectation of a 2022 liftoff for U.S. interest rates. But who knows, forecasting interest rates is not like forecasting commercial property market trends: a lot can happen quickly. Still, seeing that chart, market professionals are asking if cap rates will go up if that expectation comes to pass in 2022. My question is, why should cap rates start responding to interest rates now all of a sudden?
The composition of lenders in the U.S. commercial mortgage market has largely returned to its form before the Covid-19 crisis struck, the latest US Capital Trends report shows. CMBS originators, who had been particularly hard hit in the second quarter of 2020, captured an 18% share of the commercial mortgage market in the past quarter, which put them behind only regional/local banks as the largest source of financing. The rebound reflects an easing of the uncertainty in the lending market, which had limited CMBS originators to just a 1% share of lending a year ago.
A year and a half into the Covid-19 pandemic and loss rates for U.S. commercial real estate loans are not looking that bad. With the exception of the hotel and CBD office sectors, loss rates so far are well below the pace set through this stage of the Global Financial Crisis. The macroeconomic factors driving loan performance were simply different in this downturn. Investor tolerance for risk has followed a unique path during the Covid-19 downturn, one that varies from that seen during the GFC.
Manufactured housing represents a small share of the U.S. commercial real estate market, at approximately 1% of total deal volume, but activity in this alternative sector is gaining momentum. Sales of individual properties reached the highest levels yet in the second quarter. Acquisitions in the four quarters through Q2 2021 totaled $4.1 billion, up 48% compared with the prior four quarters and 30% above the average seen since 2017.
U.S. commercial real estate sales climbed in July and the rate of price growth accelerated as most but not all property sectors advanced past the pandemic recovery phase. Deal volume for the month rose 74% from a year ago and was above the average pace set across each July since 2005. The apartment sector was the lead destination for capital in July, constituting 35% of total commercial real estate investment, the latest edition of _US Capital Trends_ shows.
Australia’s industrial sector is going through an extended purple patch, so it comes as little surprise that yields are trending down across all price brackets. Still, the more significant industrial deals have seen yields compress more so than the smaller end of the market, as investors appear willing to splash out to secure a premium offering. Yields on transactions in excess of A$100 million are now trading at an average of 4.8%, down from 6.3% just two years ago.
Global commercial property price growth accelerated in the second quarter of 2021, the third successive quarter of increasing gains. The headline price index rose 4.8% from a year prior and 1.5% from the previous quarter, the latest _RCA CPPI Global Cities_ report shows. Seoul posted the largest price increases into midyear. Prices rose 22% year-over-year, bolstered as domestic investors who had been thwarted by global travel restrictions employed their spending power at home.
Industrial investment in Asia Pacific broke a high-water mark at the end of 2020, but investors aren’t done yet. Prior to 2021, quarterly volume had surpassed the $10 billion level only twice – in the first quarter of 2018 with the privatization of GLP, and in the fourth quarter of 2020, when over $12 billion of industrial deals were completed. The exchange of the Milestone Industrial Portfolio for A$3.8 billion ($2.8 billion) in June, Australia’s biggest ever industrial deal, helped push overall APAC industrial investment on level footing with the office sector.
Europe’s commercial property market moved back into the black in Q2 2021 after four quarters of declines in deal activity caused by the pandemic, the latest _Europe Capital Trends_ report shows. Commercial property sales increased 20% compared to a year ago, led by the U.K. where sales jumped 77%. Industrial sector deals and a couple of large London office transactions boosted the U.K. deal volume total. London was the most active commercial property market for the first six months of the year, reclaiming the top spot from Paris, which fell to third position.
Australian commercial real estate sales rose in the second quarter, fueled by increased deal appetite among domestic investors and a multibillion-dollar logistics deal, the latest _Australia Capital Trends_ report shows. Sales of income-producing properties priced A$1 million and greater totaled A$13.4 billion (US$9.9 billion) in Q2 2021, a 15% improvement on deal levels of a year ago. The biggest boost for the quarter was Blackstone’s sale of the 45-property Milestone Industrial Portfolio. The transaction was the largest portfolio deal on record in Australia.
U.S. commercial real estate prices did not collapse in response to the Covid-19 pandemic the way many investors feared, or hoped. The RCA CPPI All-Property Index stood at a record level in May of this year, fully 118% higher than the lows seen in the aftermath of the Global Financial Crisis (GFC). Consistently over the last year I have been noting that this downturn would not play out like the last and the growth in prices into midyear bears out this notion.
As the opening ceremony of the Tokyo Olympics draws near, we examine commercial property transaction volumes across Asia Pacific to see which country is on track for the gold medal in 2021. Japan had an unbroken record of 13 consecutive annual number one rankings from 2007, when Real Capital Analytics started comprehensively collecting data across the region. However, Japan comes into the delayed Tokyo Games on the back of a second-place finish, with China standing at the top of the podium in 2020.
The jet boost that the pandemic provided to online retailers has accelerated investor demand for the warehouse properties crucial to the supply chain. In the U.S., just shy of one-quarter of all investment transactions were for industrial assets in 2020 — a record for the market. In Europe a record was also set, with 16% of all 2020 transaction volume involving industrial property, Real Capital Analytics data shows. Warehouse properties let to Amazon — the business that has perhaps most changed the way consumers in Europe and North America shop — are in strong demand.