Commercial real estate investment volume in Q1 2017 ($96.9 billion) was down by 16.6% from the $116.1 billion recorded in Q1 2016. The U.S. gateway cities (New York, Los Angeles, San Francisco, Washington D.C. and Chicago) remain the top destinations in terms of investment volume. Los Angeles, San Francisco and New York City accounted for 28% of all Q1 2017 purchases.
Investor sentiment (reflected by the metro rankings in the CBRE Americas Investor Intentions Survey 2017) remains strong for gateway cities. However, the secondary markets lead the way in terms of performance. Tacoma (15.5%), Las Vegas (12.3%) and Providence (11.6%) had the highest total returns as measured by the NCREIF Property Index (NPI) for the year ending Q1 2017.
Overall, the NPI total return continues to moderate as the real estate cycle has matured and capital appreciation has fallen. Total return for the year ending Q1 2017 was 7.3%, underperforming both the S&P 500 and the S&P U.S. REIT Index.
The office sector NCREIF return for the year ending Q1 2017 was 5.7% (appreciation 1.2%, income 4.5%)—the lowest annual return since the 4.6% posted in Q3 2010. Dallas was the only metro to post double-digit returns of 10.9%. Other top-performing metros were Charlotte, Oakland and Los Angeles.
Industrial was the only CRE sector to have double-digit annual total returns in Q1 (12.2%) and outperformed the overall NCREIF index. Much of this was capital appreciation (6.7%), with income returns at 5.2%. The top-10 industrial markets posted total returns of close to 12% or more this quarter. Orlando had total returns of 22%.
Retail’s total return for the year ending Q1 2017 was 7.6%. Most of this was accounted for by income growth (4.8%). Houston was the only market that saw double-digit returns for the year ending Q1 2017, driven by capital appreciation (5.6%). Los Angeles was the only other market to record capital appreciation (5.2%) in excess of income Miami and Atlanta were all top-performing markets with income returns ranging from 4% to 5% for the year.
When trying to identify the top-performing markets going forward, forecasts for metrics such as population growth and office-using jobs growth seem to have better predictive power than others. These measure where people want to live and work.
The chart below plots U.S. metros on population growth forecast (x-axis) versus office-using jobs forecast (y-axis) for 2017-2018. Austin, Orlando, Phoenix, Atlanta, Dallas/ Fort Worth, Raleigh and Tampa all emerge as high-growth markets. Dallas/ Fort Worth and Atlanta are also ranked 2nd and 5th in CBRE’s Americas Investor Intentions Survey 2017, reflecting the strength of investor sentiment in these cities. Common denominators among these high-growth metropolitan economies include growing (in some cases, burgeoning) technology sectors, healthcare and financial services industries. Orlando and Tampa were the fastest-growing job markets in Q1 2017.
The gateway markets—a favorite of investors, particularly overseas capital—are on the low end of the growth spectrum primarily because of the existing high base of jobs and people. However, they provide the certainty of tried-and-tested markets with the additional benefit of greater liquidity.
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