This year, deal volume has increased in second-tier markets, and lower interest rates have only helped fuel more activity.
Kelsi-Maree-Borland | June 25, 2019 | Globest.com
This year, commercial real estate deal volume continues to trend upward. If the trend holds, 2019 could turn into the tenth consecutive year of positive absorption, increased rents and positive valuations across property types. As a result, loan volume continues to climb as well, particularly in second-tier markets, where investors have followed job and population growth.
“Loan activity since the beginning of 2019 has increased in tier-two markets as they become more attractive for both companies and millennials and now, investors. That’s reflected in the activity specific to Money360 as well,” Gary Bechtel, president of Money360, tells GlobeSt.com. “This time last year, we surpassed $750 million in loans closed since inception and now, we’re experiencing an increase in demand, particularly for financing of multifamily, office and industrial properties in the growing tier-two cities throughout the U.S., leading to the company’s surpassing $1.3B in loans closed.”
The gains are impressive coming off of 2018, which was also a particularly strong year for the industry. “2018 represented the industry’s ninth straight year of positive absorption as both rents and valuations continued its growth among all asset classes,” adds Bechtel. ‘2019 has so far followed suit as commercial property prices are continuing to trend upwards. Vacancy rates are low, particularly in multifamily and industrial markets and cap rates have remained steady or even lower on certain asset classes.”
At the start of the year, there was some concern about interest rates—particularly following a Fed rate increase in December. Now, interest rates have decreased and the Fed has shifted its strategy. “The drop in both Treasuries—the 10-Year Treasury is approximately 100 basis points lower than it was this time last year—and LIBOR has only kept the train chugging. Lower interest rates allow transactions to underwrite easier and provide lenders with more debt service coverage, especially on lower leverage transactions,” says Bechtel. “I’m not sure that this drop has increased loan volume but it has definitely allowed lenders to make transactions pencil whereas they might not have twelve months ago.”
This year, multifamily and industrial continue to be top trading asset classes, while office has also seen strong capital demand. “The multifamily, office and industrial asset classes have seen a surge of activity, particularly in cities like Phoenix, Seattle, Austin and Atlanta where record-setting job growth is being driven by the technology sector,” says Bechtel. “These areas offer environments conducive to businesses, a plethora amount of job opportunities and an affordable cost of living relative to other areas, which are all factors that yield greater traction in these markets.”
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