Q1 NAR® Commercial Summary
The REALTORS®Commercial Real Estate Market Trends measures quarterly activity in commercial real estate markets, through a national survey of commercial brokers from multiple markets. The survey is designed to provide a national overview of market performance, sales and leasing transactions, along with information on current economic challenges and future expectations. Below are survey highlights from first quarter 2017:
Commercial Sales
The beginning of 2017 witnessed a slippery shift in the investment landscape.
- A smaller percentage of REALTORS® reported closed transactions—62.0 percent in the first quarter, compared with 69.0 percent the prior quarter.
- Commercial sales volume declined 4.4 percent from a year ago. “Large cap” markets declined 18.0 percent in 2016. In comparison, small cap markets posted a strong 2016, with rising sales volume.
- Prices for commercial properties increased 7.2 percent compared with the first quarter of 2016. Shortage of inventory was the main driver of price movement. This trend was also mirrored in a smaller average transaction value for the quarter—$876,500 vs. $1.1 million during the fourth quarter of 2016.
- Listings remain a premium, due to increased demand, but reluctance of current users to relocate or upsize. Developers cannot build due to disparity in building costs versus potential income stream.
- Capitalization rates changes indicated a likely shift in investor risk preferences. Average national cap rates reached 7.5 percent in the first quarter, 30 basis points higher than the same period in 2016.
- Financing returned in the top three topics of concern, as small banks have been facing increased scrutiny by regulators.
Q1.2017 Cap Rates
Office Class A 7.0
Office Class BC 8.0
Industrial Class A 7.1
Industrial Class BC 8.1
Retail Class A 6.6
Retail Class BC 7.9
Apartment Class A 6.4
Apartment Class BC 7.8
Hotel Class A 7.1
Hotel Class BC 8.6
Source: May 2017 “Commercial Real Estate Market Trends Q1.2017 – NATIONAL ASSOCIATION of REALTORS®
Commercial Leasing
Commercial fundamentals remained positive in the first quarter of 2017. However, the pace of growth moderated.
- 0 percent of REALTORS® reported closing a lease transaction.
- Average gross lease volume for the quarter was $654,000, an advance of 2.3 percent.
- Leasing rates increased 3.8 percent over the previous quarter.
- Concession levels declined 11.1 percent on a quarterly basis.
- Inventory shortage topped the list of current challenges.
- New construction increased by 2.3 percent from the prior quarter, slowest pace since first quarter 2015.
- Tenant demand remained strongest in the 5,000 square feet and below segment, accounting for 84.0 percent of responses. Demand for space in the “Under 2,500 square feet” segment was virtually unchanged from the last quarter, capturing 45.0 percent of responses. Demand for properties in the “10,000 — 49,999 square feet” segment notched a noticeable jump, accounting for 11.0 percent of total responses, an almost two-fold increase from the prior quarter.
- There are lot of failures of small franchises and brick and mortar retailers. Online shopping seems to be a factor.
- Outside of the urban core and a few hot markets, much of the farther-out suburbs are still marginal and overbuilt.
Q1.2017 Rents (measured annually)
Office $46 /Sq. Ft.
Industrial $31 /Sq. Ft.
Retail $55 /Sq. Ft.
Multifamily $747 /Unit
Q1.2017 Vacancy Rates
Office 13.6 %
Industrial 9.6 %
Retail 13.2 %
Multifamily 5.9 %
Hotel 18.7 %
Source: May 2017 “Commercial Real Estate Market Trends Q1.2017 – NATIONAL ASSOCIATION of REALTORS®