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3 Important Trends in Commercial Real Estate After First Half 2016

The first half of the year 2016 showed a significant decline in certain commercial real estate transactions. During the month of August, portfolio, or bulk sales, declined a full 23 percent when compared to year over year (YOY) data from 2015. This decline is linked to the loss of market share for commercial mortgage backed security (CMBS) lenders who now maintain only nine percent of the total commercial mortgage market share.

Single volume commercial asset sales, however, have been more stable and while they have declined by 19 percent YOY for the month of August, sales are only down four percent compared to last year when all 2016 year to date sales are taken into account.

Additionally, positive leverage opportunities exist for investors interested in commercial property due to interest rates that remain below the average cap rates for office and industrial buildings as well as hotels, apartment buildings and more.

Three Important Things You Should Know
About the Commercial Real Estate Market in 2016

Overall, commercial real estate transactions have fallen this year.

The decline is most significant for portfolio or bulk sales and has contributed to the reduction of market share held by CMBS lenders concerned with new risk retention rules and approached by fewer investors interested in B-rated properties. Traditionally, CMBS lenders have traded the greatest number of multiple properties (portfolio sales) during a single deal. Back in 2012, CMBS lenders held a full 23 percent of commercial mortgage market shares while local and regional banks held a mere nine percent. Today, these figures are reversed, with the local and regional banks having acquired 23 percent of the market and the CMBS lenders reducing their portion down to nine percent.

Single volume commercial asset sales have remained reasonably stable.

Although the month of August has shown a 19 percent YOY decline in single volume sales, the year to date sales show only a four percent decline over last year's data. This is important as these single commercial transactions represent the bulk of the market; investors are attracted to an individual property based on its overall value and their general confidence in the market at that time versus the value of an entire group of properties (as occurs in bulk sales). The decline in CMBS lending has caused investors to look elsewhere for funding and local, regional, national and international banks have filled in the gaps. Loans made in 2016 by local and regional banks have shown reduced risk compared to 2015, as evidenced through lower loan to value ratios (LTV's) and higher occupancy rates of commercial buildings.

Positive leverage opportunities are available to savvy commercial investors.

Even though cap rates are relatively low, showing average rates of 5.3 percent in central business district (CBD) office buildings and 6.8 percent for industrial buildings during the month of August, average interest rates for 7-10 year fixed rate commercial mortgages are low enough to still allow a reasonable profit. Considering that other currently available investment opportunities (outside of commercial real estate) are providing low returns on investment, commercial real estate remains an attractive option to investors seeking a fairly stable and predictable income.

Commercial Real Estate Investments in Las Vegas
Are Still a Viable Option

Despite the concern expressed by some real estate professionals, plenty of opportunities to invest in commercial real estate that provide a reasonable return on investment in the Las Vegas area do exist. Granted, investors may have to look to lending sources other than the CMBS lenders they have grown accustomed to working with, but local and regional banks have filled the void and are offering interest rates attractive enough to warrant investing in commercial property with a higher cap rate the current annual interest rates of fixed loans.

Although portfolio or bulk sales have seen a significant decline, the average investor does not deal in such large transactions as the overall value of an individual building is much easier to accurately access.

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Source: Real Capital Analytics; US Capital Trends: August 2016