Commercial real estate market driven by hotel, retail sales

In an era of declining stock values and slim bond returns, dramatic increases in prices paid for hotel and retail properties in mid-2002 signaled continued investor confidence in the ongoing vitality of commercial real estate, according to the CCIM/Landauer Investment Trends Quarterly.

Of the six primary property types surveyed, only the hotel and retail sectors demonstrated higher average per-deal prices in the second quarter when compared to the previous reporting period. Investors paid an average of $34.3 million for hotel properties, a jump of 54 percent over the first-quarter average price of $15.8 million. The average price of $13.4 million for retail real estate represents a 30 percent hike from the $9.4 million first-quarter average price.

Hotels generated just 5 percent of the quarter's total deal submissions, yet accounted for 8.5 percent of investment dollars, the category's best showing since first quarter 2001. The retail sector garnered 21.6 percent of transactions in the quarter, its highest total since early 1996.

The CCIM/Landauer report, a broad-based survey of national commercial real estate investment activity, logged a record number of transactions to its database in the second quarter. The total deal count jumped 14.5 percent. The dollar volume reported also increased by 12 percent from the previous quarter.

"Real estate has again demonstrated its diversification value to mixed-asset investors, as commercial property tracks a cycle that is separate from Wall Street's," said Cynthia Shelton, CCIM, president of the CCIM Institute. "Real estate is not exempt from the economic cycle, by any means, but it has structural characteristics that moderate and delay cyclical effect."

An analysis of capitalization rates (the process of converting future income to present value) since 1995 underscores the relative stability of the commercial market. When the Investment Trends Quarterly was launched in 1995, the average cap rate was 10.4 percent. In the second quarter, the mean rate was 9.5 percent, or a drop in rates of just 9 percent.

"Given the economic and social shocks of the past two years, including the recession, terrorism, corporate and accounting scandals, and the fierce bear market on Wall Street, commercial real estate cap rates have been incredibly calm," said Hugh F. Kelly, CRE, author of the ITQ. "By this measure of valuation, commercial real estate prices have been steady, and any movement has been directly related to the amount of net operating income being produced by the properties in the year they transact."

Other key findings from the Investment Trends Quarterly are:

Institutional players continued to pour dollars into the multifamily sector, one of the most consistent property category performers with 20 percent of the national deal count.

Since the fourth quarter of 2000, apartments have captured at least 20 percent of national transactions in five of seven quarters.

During the past three quarters, the Mid-Atlantic states have logged the highest average deal price, including second quarter of this year. The current average price of $54.5 million represents a slight dip from the first quarter, yet reflects ongoing investor confidence in the region in the months following the 9-11 terrorist attacks.

The Pacific states captured the largest percentage of investment funds for the second consecutive quarter. The 29.4 percent figure in the second quarter is a slight bump up from the 28.3 percent registered in the first three months of the year.

The CCIM/Landauer Investment Trends Quarterly represents a broad-based sampling of second quarter 2002 transactions with a total value of $13.6 billion, the majority of which have been reported by Certified Commercial Investment Members.