This week a meeting with a US value added real estate manager turned to a discussion of transaction volumes and why their decline pointed to a brightening opportunity set down the line. The statistics shown were staggering. According to sources such as JLL, Cushman & Wakefield, Eastdil, Yardi Matrix, Property Shark – deal volumes (>$25 m) were down by 12% nationally in 2016 and 35% in 1Q 2017.
Sale volumes in Manhattan, the most liquid market in the US, were more pronounced, experiencing a 30% decline over the calendar year of 2016, while annualized 1Q volume represents a 64% decline from 2015 and the lowest quarterly total since 1Q 2011. Sales in office buildings were particularly chilly – they were down 80% from 1Q 2015 and 62% from 1Q 2016. Land sales were down 77% in Manhattan in 2016 and virtually non-existent in 1Q 2017.
This interesting indicator suggests that fears that the core real estate market is in “late cycle”may well have some foundation – and that the market may already be turning over. Experts attribute the drop in volumes to price discovery, suggesting a big gap between bids and asks. The paralysis may also be attributed to market uncertainty in the post-election era – maybe a “wait and see” to see if President Trump’s reflationary pro-growth agenda hits some roadblocks.
The manager we met with interpreted the current stall in volumes as a positive in the medium term as it was likely to lead to prices coming more in line with fair value. At a minimum it is a sobering data point that sits at odds with the “animal spirits” racing coursing through public markets. We are minded to watch this space!