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4Q17 Capital Markets Report

4Q17 United States Capital Markets Report

January 2018
NKF Capital Markets presents the Fourth Quarter 2017 United States Capital Markets Report. The statistics and in-depth market perspective contained in the report illustrate current trends with a focus on national investment sales.

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From shifting global macroeconomics and local politics, to evolving technologies and corporate strategies, the trends over the past year have greatly varied, yet opportunities in commercial real estate abound. While total sales volume declined in 2017, it did not fall precipitously. Even though the office market suffered from a lack of available core product to purchase, notably in New York City and San Francisco, the second half of the year proved much stronger than the first. In terms of multifamily assets, the first quarter appeared to be the outlier in an otherwise strong investment year - in fact, multifamily sales volume in the remaining three quarters of 2017 kept pace with the same quarters in 2016. Industrial sales managed an impressive 18.4% volume gain, compared with 2016, boosted by global demand for “last mile” distribution and warehouse space near major metros (that are heavily used by the booming e-commerce industry).

On the macroeconomic policy level, the Federal Reserve raised it’s benchmark rate on three separate occasions in 2017, largely in response an improving economy as well as a strong labor market, which added 2 million jobs over the course of the year. However, despite this contractionary monetary policy step, the Trump Administration has passed some of the most ambitious fiscal expansionary policies in decades, which promises to lower corporate taxes, as well as ease the tax burden on pass-through entities that serve as vehicles for commercial real estate investment. Beyond policy in the US, the commercial real estate industry has increasingly looked outward. International groups have become a stable source of capital for commercial real estate across many domestic markets, with international investors in cities such as New York accounting for over 30% of the total sales volume in 2017.

The Asia Pacific region has once again demonstrated its increased appetite for commercial real estate across the US. Singapore’s GIC and Mapletree have pioneered foreign investments in student housing and data center portfolios, totaling in the billions. Japan, reinforced by economic growth at home, the continuation of quantitative easing and “Abenomics” has returned to the US, highlighted by Mori Trust’s $673 million acquisition of 10 Saint James in Boston in the first quarter. Nevertheless, the APAC region has not been a complete boon: while spending over $5 billion in the first half of the year, Chinese insurance giants have since felt pressure from the ruling party to cut back on, as they described, “irrational acquisitions” (particularly high profile trophy assets in primary markets) and have slowed acquisitions noticeably. The government is expected to deliberate this year, and will likely reassess their position on capital controls in 2018.

The Middle East similarly has shown mixed signals. Despite increasing oil prices, institutional buyers in oil-centered Gulf States have remained relatively quiet in 2017, with the exception of QIA, which has teamed up with local buyer Douglas Emmett Realty to acquire several large office assets in Los Angeles.

Finally, Europe was a significant source of capital in 2017, despite geopolitical instability on the continent following the United Kingdom’s decision to leave the European Union. German groups led the buying of non-entity assets, scooping up minority interests in trophy office properties, such as One Astor Plaza in New York and the Wells Fargo Building in San Francisco. In an entity-level transaction, France’s Unibail-Rodamco acquired Australia’s Westfield (which owned and operated 39 malls throughout the US) for $16 billion, in the largest property transaction in five years. The Netherlands’ APG Group also was involved in a landmark entity acquisition: in a joint venture led by Greystar, they acquired Monogram Residential Trust, a REIT with 45 well-located multifamily assets valued over $4 billion, concentrated in the southern and western states in the US.

Where do we go from here… Despite a mixed 2017, demand for core and value-add product persists, however large quantities of dry powder remains on the sidelines. As core product available in primary markets becomes scarcer, institutional investors will increasingly seek out additional, higher yielding product in secondary markets as well as specialty asset classes, such as senior housing and data centers, in search of portfolio diversity. The global economy is expected to expand as policies take effect and strong economics extend the current cycle.

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