Transaction volume grew in Q1 but real estate investors remain
Strong first quarter performance underpinned by liquidity for industrial, multifamily and hotel assets
CHICAGO, May 10, 2018 —Transaction volumes exceeded expectations in the first quarter of 2018 with 4.7 percent year-over-year growth, according to JLL's Q1 2018 U.S. Investment Outlook. In total, $98.7 billion in trades took place across commercial real estate with the industrial, multifamily and hotel sectors outperforming and driving growth. Yet selectivity prevails and investors remain disciplined.
The industrial sector outperformed the broader market by dollar volume with first quarter activity increasing 20.8 percent year-over-year to $15.9 billion, marking the second strongest start to a year on record for the sector. Hotel activity also grew significantly as transaction volume shot up 78.0 percent year-over-year, boosted by portfolio activity and ongoing interest from offshore investors.
Multifamily also experienced another surge in transaction volume, growing 32.2 percent year-to-date and leading all sectors for the fifth consecutive quarter at $33.7 billion. In the office sector, the prolonged period of cap rate compression is testing investors' ability to achieve yield and the sector posted a 5.6 percent softening in volumes. While retail investment declined notably, large in-progress portfolios are expected to boost full-year activity considerably.
"The U.S. economic outlook is increasingly favorable," said Jonathan Geanakos, President, JLL Capital Markets, Americas. "However, we expect overall investment into commercial real estate in 2018 to decline in favor of debt and M&A as underwriting remains disciplined."
Dry powder for acquisitions increased by 15.9 percent in the first quarter, growing to an all-time high of $175.0 billion, but the allocation and redeployment of capital remain key areas of concern for investors underwriting acquisitions at current pricing. The bid-ask spread remains throughout and will hamper meaningful growth in activity in the near-term.
Industrial powers on
Industrial fundamentals remained excellent through the first quarter, with vacancy dropping 20 basis points to a record-low 4.8 percent nationally. The current momentum is expected to propel 2018 to the second highest annual volume on record, as a growing number of funds are actively pursuing industrial acquisitions, particularly large-scale portfolios and entity-level capital placement.
Competition for assets continues to heat up. Valuations have reached all-time highs and investors are seeking out product in markets well beyond the typical industrial powerhouses as they become more experienced in the sector. Tertiary market activity for the first quarter increased 27.5 percent from the first quarter of 2017.
Despite international trade tensions and the potential impacts on industrial product, JLL is forecasting 2018 industrial transaction volumes to be the second highest on record.
Supply-side risk not deterring multifamily investment
The multifamily sector saw an uptick in activity as investors were drawn back to primary markets where high-rises continue to deliver. More than 45 percent of all multifamily transactions took place in primary markets, with New York leading the country.
"Multifamily continues to be a critical driver of transaction volumes across the country even as rent growth is plateauing," said Sean Coghlan, Senior Director of JLL Investor Research, Americas. "The asset class is on solid footing as the economy continues to drive demand for these assets."
Also underpinned by strong operating fundamentals, the hotel sector experienced a surge of nearly 300 percent in portfolio activity, which drove up overall volumes by 78 percent year-over-year, totaling $8 billion for the first quarter. The 52-week moving average for occupancy hit the highest it's been over the past ten years.
Foreign capital expected to increase activity
Cross-border investors remain focused on expanding real estate assets under management in the U.S., but investment was tepid in the first quarter. Canadian and European investors continue to drive an increased level of offshore acquisitions
"As expected, institutional investment from mainland Chinese buyers has slowed considerably," said Geanakos. "However, we expect Asian buyers as a whole to continue to be active, especially as they look to high-quality assets outside of gateway markets in their search for yield."
Bucking the overall trend, foreign investment into the hotel sector increased to 26 percent of total volume in the first quarter.
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JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2017, JLL had revenue of $7.9 billion; managed 4.6 billion square feet, or 423 million square meters; and completed investment sales, acquisitions and finance transactions of approximately $170 billion. At the end of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of 82,000. As of December 31, 2017, LaSalle had $58.1 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated.