Commercial property deal activity in Europe slumped during the third quarter, rocked by the Covid-19 pandemic’s continued impact on dealmaking, economic growth and market prospects. The latest edition of Europe Capital Trends shows deal volume dropped 43% in the third quarter from a year ago, and was down from the levels seen in the second quarter of this year.
Global and regional cross-border investors pulled back from new Asia Pacific deals in Q3 2020 at almost double the rate that domestic buyers retreated, preliminary Real Capital Analytics data shows. Investment by domestic buyers was higher in the third quarter than the second quarter of 2020, though the level was down significantly versus a year ago.
The annual rate of U.S. commercial real estate price growth came in at 1.4% in September, as continued gains in apartment and industrial sector prices balanced out declines in retail and office prices, the latest RCA CPPI: US summary report shows. The US National All-Property Index gained 0.2% in September from August.
U.S. deal activity has corrected in 2020 following the onset of the Covid-19 crisis. Looking at total acquisitions by all investor types, deal volume for the past two quarters has retreated to levels last seen in 2012. Institutional investors, however, stand as net buyers of U.S. commercial real estate in the face of the pandemic.
The latest data from Real Capital Analytics shows that the European logistics sector continues to attract plenty of capital amid the myriad of uncertainties caused by the Covid-19 crisis. The flow of investment into logistics properties has buttressed the industrial sector overall and it is the only major property type to register higher deal activity so far this year than 2019.
German investors have new incentives to look at commercial real estate investments in the U.S. This group of investors was the second largest source of cross-border capital for deals in the U.S. over the last 12 months, behind Canadian players. A short while ago it was difficult for German investors to look at U.S. because of hedging costs. Those costs are fading and can make U.S. investments look comparatively inexpensive.
The Covid-19 pandemic has struck Spain particularly hard. Cases and total deaths from the first wave of the outbreak were among the highest in the world and a secondary surge is underway. The extent of the Spanish government’s lockdown and the resultant economic fallout has had a marked effect on the country’s commercial real estate market. Deal volume through the end of August fell 54% versus the same point in 2019 and the deal count dropped by 37%.
News of the planned sale of a Beijing data center campus for half a billion dollars may have come as a surprise to some. However, the deal — which, if it closes, would be the largest industrial deal in the Asia Pacific region in 2020 — is just one of a bundle of pending data center transactions in the region.
Given news headlines, it’s to be expected that retail and hotel properties would represent a large share of newly troubled assets since the start of this Covid-19 recession. The magnitude of their shares may be more surprising. Retail and hotel assets combined represented 92% of new trouble in the second quarter of 2020. In the depths of the GFC, these two sectors were behind only about half the total distress.
Over the past six years there has been an explosion of institutional investment into student accommodation around the world on the premise that demand for housing is robust. That premise has been thrown into doubt as Covid-19 forces universities to reduce or cancel in-person teaching and thwarts travel by international college students.
U.S. commercial property prices posted a 1.6% year-over-year gain in August as declines in retail and office pricing weighed against continued growth in industrial and apartment prices, the latest RCA CPPI summary report shows. The US National All-Property Index was rising at close to a 6% rate at the start of 2020, before the Covid-19 crisis hit the economy.
The 10yr US Treasury has averaged less than 1% every month since March 2020. Commercial mortgage rates have barely budged despite this sustained low level for the interest rate environment. In any normal period, low interest rates would be a positive sign for commercial real estate investment. Interest rates remaining at such a low level over a sustained period is a sign of weakness in the economy.
The debt portion of the U.S. capital stack has seen a tumultuous 2020. Key industry participants have pulled back on mortgage originations in response to the uncertainty around the Covid-19 recession. Commercial mortgage originations in the second quarter of 2020 were supported by banks and the GSEs. The debt portion of the capital stack is more stable today than it was in the last downturn.
U.S. sales involving large office buildings had been on the decline throughout the economic expansion. As more small buildings sell, other measures of market health such as the dollar volume of deal activity can reveal a different meaning. A $100 billion market where half of the volume was concentrated in the purchase of expensive office towers is qualitatively distinct from a more broad-based market driven by the sale of a multitude of small buildings.
Over the first seven months of 2020, trading of retail assets has crumbled by more than half across all the major Asia Pacific economies bar one – South Korea. Should the current pipeline of deals close by year end, Korea’s 2020 retail investment total will surpass last year’s tally and could potentially become Asia Pacific’s biggest retail investment market, breaking the lock on the top three spots typically held by China, Japan and Australia.
Despite historic challenges to commercial real estate deal activity in 2020, prices in most leading North American metros continued to move higher in the second quarter of the year, according to the latest RCA CPPI Global Cities report. New York metro area prices, which have lagged Manhattan price gains over the past decade, increased 9.0% from a year prior.
Rising distressed sales of commercial properties can be the push that topples commercial property prices, but with the exception of the hotel sector, such activity is still a small portion of the U.S. market. The economic calamity from the Covid-19 crisis has changed investor perceptions of prices with few still willing to step up to the high pricing set before the upheaval.
Market liquidity fell in 111 of 155 global commercial real estate markets in the second quarter of 2020, according to the midyear update of the RCA Capital Liquidity Scores. The count of markets posting lower quarter-on-quarter levels of liquidity is the worst since the Global Financial Crisis.
Investors stuck to the forward transactions route to acquire European office properties in the second quarter of 2020, indicating that investor demand for the asset type is still alive despite concerns over future needs for corporate space. Forward commitments leapt to a record proportion of European office deal volume, with the jump in share reflecting the resilience of these deals and the slump in the office market overall.