Deal activity data giving hints of a recovery
Deal activity data released by CBRE indicates signs of recovery in the commercial real estate sector after a very tough first half of 2020.
Towards the end of July, the number of signed confidentiality agreements were down by only 17% year-on-year. In any normal year this would seem like a bad result, but when you compare this 17% drop with a 74% year-on-year drop shown in April and May, it’s a marked improvement. The curve shown in Figure 1 below clearly shows this encouraging trend.
Figure 1: The Rebound of Investor Inquiries (Y-o-Y, 4-week moving average)
Source: CBRE Deal Flow, July 2020.
Industrial and multifamily leading the field
In total signed confidentiality agreements in Q2 2020 stood at 40% of the past two years’ average. Industrial and multifamily were the top two performing sectors, reaching 46% and 42% respectively. An increase in online shopping due to COVID-19 lockdown measures has helped to support demand for logistic facilities and warehouses
Office sector worse performing – but dig deeper for assets showing promise
The office sector was the worst performing in terms of signed confidentiality agreements, achieving only 33% of the past two years’ average. Work-from-home COVID health concerns and the potential for companies to more enthusiastically embrace remote-working-arrangements have weakened the rental outlook for some office properties.
Drilling deeper into the office market, CBRE’s data shows that “operational” assets, such as life science facilities, datacentres and single-tenant buildings have been more resistant to downturn risks, with total transaction levels and average price per sq. ft. holding up better than the rest of the sector.
Figure 2: Industrial and Multifamily Lead Recovery in June
Source: CBRE Deal Flow, July 2020.
With investors requesting price reductions, property values are expected to decline 10% to 20% by year’s end, causing a moderate rise in cap rates. These cap rate increases are particularly apparent in the July figures for retail and office, while industrial and multifamily cap rates remain stable for now.
Figure 3: Class-A Cap Rate by Asset Type
Source: CBRE Econometric Advisors, Q2 2020.
