The sluggish pace of commercial real estate lending seen in the first half of last year is expected to improve in the coming year. Commercial real estate transactions are on the rise, but are likely to be tempered by new fears among investors.
The first half of last year was marked by new lows in terms of real estate transactions. By the midpoint of 2017 commercial real estate investment trusts have completed only $46.7 billion in sales, far below the 71 billion in sales the same trusts achieved over the same period in 2016. Investors were gripped with uncertainty about interest rates and the new political realities of the incoming administration. “The slowdown in transactions at the start of  came with the jump in interest rates and the [uncertainties of the] election. As people have readjusted to the new order, deal flow has started to pick up,” said 10-X Chief economist, Peter Muio. As investors adjusted to these realities the total sales volume of commercial property rose by 15.6% over the second quarter of 2017. Transaction volumes are also expect to continue to increase over the coming year.
Buyers and sellers of commercial property also had varied expectations about the commercial real estate market at the beginning of last year. “The other challenge is the falloff in transaction activity due to the wide gap between seller and buyer pricing expectations,”said Muio. “This widening of the bid-ask spread was sourced over doubts over the continuation of the cycle on the buy-side, a rise in interest rates heading into the year and seller expectations for robust pricing increases. We believe this gap will begin to close in 2018, and it will do so due to sellers accepting the new paradigm.” In other words property owners held out for higher prices in the expectation of rising property values while real estate investors remained unwilling to pay these higher prices. Both sides are expected to continue adjusting their expectations as the year continues, which will make buying and selling easier.
As sales of commercial real estate increase, commercial real estate lending is likely to increase as well.
Investors have adapted the new realities of last year and both buyers and sellers of commercial real estate have new more realistic expectations in terms of pricing. These trends which helped boost commercial real-estate transactions last year are expected to continue into 2018. Analysts perceive a large amount of capital set aside specifically for investment in commercial real estate. “ After a year of slow activity we are hopeful that sales volumes will rise in 2018. One important reason for this is the large amount of capital targeting real estate,” said principle economist at Kushman and Wakefield, Ken McCarthy.”There is an estimated $152B in dry powder waiting to be deployed. And while investors were cautious in 2017, we anticipate the healthy economy at home and abroad [will] give investors more confidence, leading to stronger sales.” Analysts predict most of this money will be used for investment in multifamily and industrial real estate. Sales of office ,retail and hotels will continue to struggle in 2018.
Investors in commercial real estate face new uncertainties this year which makes the pace of commercial real estate lending hard to predict.
Commercial real estate transactions are unlikely to reach last year’s historic lows. The dramatic spike in sales, which began in the second half last year, is expected to wane as the year continues. investor face new uncertainties about an upcoming market correction and ambiguity remains about the impact of the recent Republican tax bill. as investors address these issues commercial real estate transactions are unlikely to rise dramatically over the coming year, but are expected to return to historic averages.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.