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U.S. Commercial Real Estate

The commercial real estate market in the United States appears to have enjoyed a relatively strong first half of the year in 2016, according to the mid-year report issued by the National Association of Realtors.

The commercial real estate market in the United States appears to have enjoyed a relatively strong first half of the year in 2016, according to the mid-year report issued by the National Association of Realtors. As detailed in the NAR’s August report, the demand for commercial spaces “remained robust” in the first half of the year, with solid fundamentals and strong sales volume evident through the 2nd quarter in most markets.

But the NAR’s report goes on to note that the US commercial real estate market shows some signs of cooling, with cap rate compression evident in both the apartment and office property market segments. The report also cites a relative weakening in large cap markets, where commercial real estate sales volume declined about 16% from the levels recorded in the first half of 2015, compared to small cap markets, where sales volume retained its upward momentum. According to Real Capital Analytics, even with a dip in sales volume, large cap commercial real estate markets nonetheless showed price strength with hefty price gains reported for apartment and retail properties, of 11% and 9.1% percent respectively. Office property sales on the other hand recorded a slight dip of 0.5%.

While the general tone of the NAR report (based in part on a survey of commercial real estate brokers) remains upbeat, some commentators have begun to note more widespread signs of weakening, particularly in the demand for office property in large cap markets. Keith Jurow, author of the well regarding Capital Preservation Real Estate Report, issued a warning on the stock equity price for large office REITs, based on the mounting signs of weakening demand and a growing overhang of space for sublease in the top US commercial markets.

Jurow, in part, bases his call for a pending correction in the broader commercial real estate market on the observation that weakness in commercial real estate generally starts in the center or the hottest markets and then works out to the periphery. In that way, Jurow’s bearish view of the market is actually quite consistent with the data collected in the NAR’s far more upbeat survey, with clear signs of price pressure emerging in large cap markets for office properties.

But whatever view one takes of the forward-looking prospects for the US commercial property market, there’s no doubt that the market’s current strength owes much to the very active participation of foreign buyers. The most recent report from the real estate research firm CBRE finds that Asian capital remained very active in overseas real estate markets in the first half of 2016, with North America attracting the majority of investor interest. Of the total outbound investment by Asian capital in real estate, $14 billion (or 52% of the total) was directed towards the Americas, $6.1 billion (or 28%) was targeted towards EMEA investments and $5.4 billion (or 20%) was focused on cross-border opportunities in Asia. The most favored market for Asian investment was New York City, followed by London. The office market accounted for 47% of the new investment activity compared to 33% of the investment, which targeted hotel and hospitality properties.

Breaking down the data a bit further, the CBRE report shows that Chinese investment accounts for a majority or 60% of the total Asian outbound real estate investment flow. Chinese insurance companies are playing an outsized role in driving this investment activity, accounting for 50% of the total flow of outbound real estate investment activity, with Chinese conglomerates and developers accounting for 23% and 10% respectively. As a result of the increasing involvement of insurance company investors, CBRE further notes that the dollar size of deals has significantly increased with portfolio deals accounting for half of the 10 largest deals announced in the first half of 2016.