Commercial real estate: 1st quarter dollar volume highest level since 2001

The national commercial real estate market displayed resiliency in early 2003, exceeding previous high levels for both the amount of dollars invested and the number of individual transactions reported, according to the CCIM/Landauer Investment Trends Quarterly.

This recently announced positive economic news was tempered by Gross Domestic Product figures that dipped 2 percent and nonfarm employment rates, off 4 percent, from fourth quarter 2002.

Nationally, investment dollars allocated to commercial properties in first quarter of this year climbed 11 percent over the previous quarter, the highest level reported in the ITQ survey since second quarter 2001, the reporting period prior to the 9/11 terrorist attacks.

The number of transactions recorded jumped 15 percent from late last year to claim a new record.

"Some analysts have suggested that the reason capital has flowed to commercial property is merely because the alternatives are not attractive," said 2003 CCIM Institute President Barry Spizer.

"Perhaps there's some truth in that statement, but real estate also is playing an important and valuable role for the investment community. Our data indicates that the equity and debt players are doing a good job pricing risk, which means commercial property may win the argument that it deserves a higher share of the overall investment pie."

Investment by market

Investors did continue the long-standing trend of showing favor on the office market, which historically tops all property types in terms of investment dollar volume and deal count. This was the case in first quarter, as offices captured 40.1 percent of dollars invested and 23.9 percent of all deals.

Apartments accounted for 21.2 percent of the dollar volume, a significant increase from 14.1 percent in late 2002, and the sector's best dollar tally since early 2001. The retail sector showed its third consecutive quarter of investment growth in first quarter, with a 2 percent increase in the deal count and a slight increase in the percentage of dollars invested.

Institutional investors directed capital from stocks into real estate in late 2000, which helped push the mean deal price above $20 million. The mean price has been as high as $30.4 million in second quarter 2001, plummeting to $16.1 million the following quarter. In first quarter 2003, the price logged in at $21 million, a slight drop from the previous quarter. The median price, however, was quite lower at $9.4 million.

"Plenty of properties were available to satisfy investors on a budget" said Hugh F. Kelly, author of the ITQ report.

"We find little evidence that the small investor is being crowded out as the institutions step up their real estate portfolio allocations."

Other key findings reported in the first quarter 2003 issue of the Investment Trends Quarterly are:

The national average capitalization rate for all properties dipped to 8.8 percent, the first time the rate fell below 9 percent since the ITQ originated in 1995. Cap rates logged within the 9 percent range since fourth quarter of 1997.

Prior to that period, cap rates were above 10 percent.

Roughly half of the national deal flow was attributed to two regions: the Pacific states (Alaska, California, Hawaii, Oregon and Washington), which logged 24 percent; and, the Southeast states (Alabama, Florida, Georgia, Kentucky, Mississippi, North Carolina, South Carolina, Tennessee, Virginia and West Virginia), which logged 27 percent.

The deal count within all major property types was up when compared to the previous quarter, with the exceptions of the land market, which showed declines of 8 percent.

The record deal count for all properties in the first quarter reversed a two-quarter decline.

The CCIM/Landauer Investment Trends Quarterly represents a broad-based sampling of first quarter 2003 transactions with a total value of $14.6 billion. Since the survey was initiated in 1995, 14,867 transactions valued at more than $238 billion have been analyzed.