Market Intelligence Report: Fourth Quarter 2014

Market Intelligence Report: Fourth Quarter 2014

by Anthony J. Buonicore, P.E.Principal, The Buonicore Group, Shelton, CT


Sustained economic momentum, robust investor demand and lender optimism has created what is now universally considered a healthy commercial real estate market. Operating fundamentals for commercial real estate continue to improve with the multifamily and industrial sectors leading the way. Strong capital flows from both equity and debt sources are boosting liquidity and driving transaction activity. Equity capital of all types, from local investors and 1031 exchanges to institutions that include REITs, private equity and sovereign wealth funds, have accelerated acquisitions and portfolio repositioning to capitalize on the low cost of capital, consistent revenue streams, and rising prospects for appreciation. At the same time lenders are back in full force with mortgage origination activity at record levels. The wave of liquidity has pushed property prices to record or near-record levels in core markets and is now spreading into secondary and tertiary markets.

The U.S. commercial property investment-sales market continues to improve, with about $430 billion of properties changing hands in 2014, up nearly 20% from the $361 billion in 2013 and up more than 430% from the $68 billion done in 2009 when the capital markets virtually collapsed. In 2007, the market’s peak year, $573.5 billion of properties changed hands. The expectation is that 2015 will see at least a 10% increase in sales volume over 2014, despite the expectation that interest rates will be slightly higher.

The moderate pace of the economic recovery has been good for commercial real estate performance. New construction usually comes roaring back during the recovery cycle following recessions, but incremental growth and the fresh memory of a severe recession has kept development largely in check. The growing economy has resulted in a higher demand for space, and limited supply has enabled property owners to push rents. These improvements, as well as further easing of credit conditions, will likely further bolster the performance of commercial real estate and CMBS in 2015. The result should be stronger fundamentals and increased transaction volume across all property sectors in both primary and secondary markets.

Major Property Types

Multifamily continues to lead commercial real estate through the recovery and into expansion. The sector resoundingly outperformed consensus expectations in 2014, making the sector by far the most active. The sector is flush with capital and remains an investor favorite. Historically low vacancy rates, demand momentum and demographic support from the millennial generation has produced rent gains and values that will not abate anytime soon. While demand is expected to remain firm, the supply of new units coming on the market is at a 14 year high and poised to increase even faster over the next couple of years, which will exert modest upward pressure on the vacancy rate and reduce the rate at which rents have been increasing. At the same time, with supply lagging demand net absorption is at the highest level in nearly a decade. Cap rates continue to compress across all market tiers, with the sharpest contraction in secondary and tertiary markets. At the end of 2014, pricing for multifamily assets had exceeded its 2007 peak and sales activity is expected to approach the peak levels of 2005 and 2006 in the coming year.

Next to the multifamily sector, the industrial sector has posted the strongest recovery. On the strength of resurgent manufacturing and brisk international trade, demand for warehouse space continues to increase, with demand continuing to outpace supply. E-commerce has been a major driving force for warehouse and distribution space, benefiting markets near major metropolitan areas, as well as major shipping hubs. Fundamentals in the sector continue to improve, with some of the strongest fundamentals in the last 30 years. Demand for space is flirting with an all-time high and vacancy is nearing a new cyclical low. The tightening market, i.e., demand outpacing supply, has pushed average asking rental rates to a five year high. The strengthening in demand, drop in vacancy rates and increase in rents has reached a point where new construction is underway in many markets with an attractive pipeline of proposed projects, all of which will likely have a moderating effect on rent growth. Sales activity is expected to remain strong in the coming year.

An expanding economy and accompanying growth in jobs and income has contributed to steadily increasing lodging sector demand. With increasing demand and accompanying occupancy constraints, room rates are increasing and reaching new highs. Average daily room rates and revenue per room have increased 5% year-over-year. Occupancy has now topped its pre-recession peak. Rate gains are expected to accelerate in 2015, driving a further revenue per available room (RevPAR) increase as hotels achieve their highest occupancy in three decades. Occupancy is expected to rise an additional 1.1% to 65%, while average daily room rates are expected to increase 5% and RevPAR by more than 6%. Broader access to debt and more favorable lending terms are underpinning a heightened level of hotel transactions, with a greater number of lenders, including CMBS lenders and national, regional and local banks, competing for deals than at any time since the sector’s recovery started four years ago. There is also an abundance of capital offered by off-shore buyers, private equity funds and REITs. The construction pipeline increased more than 40% year-over-year and many markets have sizeable construction pipelines.

Compared to the multifamily, industrial and lodging sectors, the office sector is following a much different trajectory. As the great recession sliced off 8.7 million jobs, demand for space plummeted, with vacancy rates rising from 2008 to 2010 and peaking at almost 18%. At the same time, a new wave of efficiency measures directed at reducing the office space per worker compounded the vacancy rate problem. A large majority of markets have now added office-using jobs, resulting in higher occupancy rates and posting net absorption numbers that are beginning to resemble pre-crisis demand levels. The square footage absorbed in 2014 made it the strongest year of demand since 2006. Although overall vacancy has yet to return to pre-crisis levels, fundamentals are accelerating at a tightening rate in most markets. Rent growth year-over-year continues to accelerate, with effective rents increasing for seventeen consecutive quarters. Even with overall vacancy rates remaining stubbornly high, the demand for office space and prices for office properties have improved to a point where new office construction is now viable in select major and mid-sized markets, particularly energy and technology-related markets. While investment in Class A buildings in top tier central business districts has regained its stride, the recovery is beginning for Class B and Class C suburban properties and properties in secondary markets. Sales transaction activity is increasing, driven by readily accessible debt capital, with sales in 2014 surpassing $100 billion for the second year in a row. The office sector is approaching its cyclical stride and is expected to be fully recovered in most markets by the end of 2015.

Similar to office properties, retail property fundamentals have been slow to bounce back. Notwithstanding, vacancy rates are declining modestly with rents improving slowly. The retail sector’s slow recovery is expected to continue as the larger economy gradually improves. Wage growth and housing market recovery are paramount to continued improvement in consumer spending and thus overall demand for retail space. Escalating job gains and rising consumer confidence have supported retail spending, but weak income growth still constrains core retail sales. Retail space fundamentals remain on a clear path to recovery, albeit a slow and inconsistent recovery. Asking and effective rents continue a slow but decidedly upward rent growth trend. The market remains bifurcated with strength at the discount and luxury ends of the market spectrum, but weakness in the middle-market. As such, the recovery while moving in a positive direction remains uneven. Rapidly growing e-commerce by retailers has resulted in downsized existing retail footprints but an increase in distribution centers for expedited delivery. While this adaptation may drive retail sales, it has constrained the demand for traditional retail space. Power centers, grocery-anchored centers and upscale outlets are the focus of new construction activity, particularly in markets where availability is tightening. Improving labor markets and the decline in energy prices are expected to accelerate retail sector recovery in 2015.

Capital Markets

The capital markets continue to provide considerable liquidity to the commercial property sector. Strong capital flows from both equity and debt sources are boosting the liquidity of the commercial real estate market and driving transaction activity. Equity capital of all types, from local investors to institutions that include REITs, private equity, life insurance companies, pension funds and sovereign wealth funds, have accelerated acquisitions and portfolio repositioning to capitalize on the low cost of capital, consistent revenue streams, and the rising prospect for appreciation. At the same time lenders including commercial banks, life insurance companies, CMBS and REITs are back in full force to provide debt capital.

Bank lending against multifamily and commercial real estate has been rising for ten consecutive quarters and has now reached an all-time high. It is 9% above the pre-financial crisis peak. According to the Mortgage Bankers Association’s 3Q2014 Survey of Commercial/Multifamily Mortgage Bankers Originations, 3Q14 commercial and multifamily loan originations on a dollar volume basis were 16% higher than during the same period last year, and 18% higher than in 2Q14. The increase in the third quarter was strongly influenced by an increase in originations for industrial and multifamily properties. The increase included a 41% increase in loans for multifamily properties, a 22% increase in loans for industrial properties, an 11% increase for office properties, an 11% increase for retail properties, and a 4% increase in hotel property loans. Compared to last year’s third quarter, lending (on a dollar volume basis) associated with CMBS increased by 47% and originations for GSEs (Fannie Mae and Freddie Mac) increased by 118%. Loans by life insurance companies increased by 1% compared to a year ago, and there was a 16% decrease in commercial bank portfolio loans. Commercial and multifamily mortgage origination volume in 2014 rose by 6% compared to the previous year. The Mortgage Bankers Association (MBA) forecasts that commercial and multifamily mortgage originations will increase 8% in 2015 from their prior year level.

According to the MBA, in the third quarter of 2014 commercial banks continue to hold the largest share of commercial and multifamily mortgages, holding $944 billion or 37% of the total. CMBS, CDO and other ABS issues are the second largest holders of these mortgages, holding $535 billion or 21% of the total. Agency and GSE portfolios and MBS hold $400 billion or 15% of the total and life insurance companies hold $351 billion or 14% of the total. REITs, private pension funds, and government pension funds hold $36.6 billion, 19.6 billion and $9.3 billion, respectively, or 1.4%, 0.8% and 0.4%, respectively.

The number of FDIC-insured institutions reporting financial results fell to 6,589 in the 3Q14 from 6,656 in the second quarter. In 2007, prior to the last fiscal crisis, there were 8,559 FDIC-insured banks reporting. During the third quarter of the year two insured banks failed, bringing the total year-to-date to 14. The number of institutions on the FDIC’s problem list in 3Q14 continued to fall, from 354 in the second quarter to 329 in the third quarter. This is the smallest number of “problem” institutions since the end of 1Q09, and is 63% below the peak level of 888 at the end of the first quarter of 2011.

Real Capital Analytics (RCA) tracks the distressed commercial real estate asset market and reported $105.3 billion in remaining distressed loans associated with 8,308 properties, down from $109.3 billion in distressed loans associated with 8,729 properties reported in the last quarter. The size of the distressed asset market peaked at $191.5 billion in October 2010. The $105.3 billion total consists of $62.3 billion in troubled loans associated with 5,009 properties (down from $64.6 billion associated with 5,272 properties in the last quarter) and $42.9 billion in lender REO associated with 3,299 properties (compared to $44.7 billion in lender REO associated with 3,457 properties in the last quarter). Approximately three quarters of the $412 billion in commercial real estate loan defaults since the 2007 market peak have been resolved. Distressed asset sales are no longer a major concern impacting property pricing.

The Federal Reserve’s October 2014 Senior Loan Officer Opinion Survey on Bank Lending Practices, found that about a quarter of the banks surveyed indicated they experienced “moderately stronger” demand for construction and land development loans in the quarter. Approximately two-thirds of the banks indicated the demand “stayed about the same as in the previous quarter.” With respect to commercial real estate loans secured by commercial property, almost 30% of the banks surveyed indicated they experienced “moderately stronger” demand in the quarter. Approximately two-thirds of the banks indicated the demand “stayed about the same as in the previous quarter.” With respect to multifamily real estate loans secured by multifamily property, almost 30% of the banks surveyed indicated they experienced “moderately stronger” demand in the quarter, with two-thirds of the banks indicating the demand “stayed about the same as in the previous quarter.”

Commercial and multifamily mortgage performance continued to strengthen during the third quarter. Delinquency rates for loans held by life insurance companies, Fannie Mae, FDIC-insured banks and CMBS all declined in the quarter. Only the delinquency rate for loans held by Freddie Mac increased.

A total of $89.9 billion of domestic, private label CMBS was issued in 2014, up 11.2% from the prior year. While volume was up, it was roughly 10% shy of initial industry expectations, principally because of a lackluster first half of the year. The consensus is that issuance volume will climb by at least another 18% and as much as 45% in 2015, bringing expected issuance to between $105 billion and $130 billion for the year.
A total of $302.5 billion of CMBS loans (more than 25,000) are slated to mature between now and 2017, with $70 billion of that coming due in 2015, $114 billion maturing in 2016 and $119 billion coming due in 2017. When the maturity of loans held by other investor types is added, the total volume of maturities coming due between now and 2017 is more than $360 billion. The expectation is that CMBS lenders are likely to win up to one-third of the overall maturity universe and 85% of the universe of maturing CMBS loans.

Delinquency rates for loans in CMBS continue their improvement trend. The U.S. CMBS 30+ days delinquency rate in December was 5.75%, compared to 7.37% one year ago. Year-over-year delinquencies have fallen 167 basis points and are set to crack the 5% threshold at some point in 2015 as long as rates remain low.

Life Insurance Companies
Life insurance companies are increasing their allocation to commercial mortgage loans as an alternative to lower yielding bonds. Commercial mortgage loan allocation typically ranges between 8% and 12% for most insurers, although the larger companies have allocations as high as 15%.

Life insurance companies continue to be very active in multifamily lending and are competing neck and neck with GSEs – Fannie Mae and Freddie Mac. While the GSEs have remained dominant, life insurance companies are finding more creative ways to compete with them. Where GSEs often have their hands tied when it comes to loan limits and restrictions, life insurance companies are free to adjust throughout the underwriting process. Another reason borrowers find it attractive to go with the insurance companies is their ability to lock in a rate at the time of application. GSE deal cycles take much longer (at least three weeks to get a rate lock), leaving rates open to change while borrowers are waiting. Life companies are also easier to deal with. As balance sheet lenders, life companies will not securitize the loan, meaning borrowers have access to the lender if the loan must be re-visited for whatever reason. By selling their loans on the open market, restructuring loans with GSEs is virtually impossible.

Pension Funds

Public and private pension funds have recently announced significant commitments to commercial real estate. Public pension funds are estimated to be raising their allocations from 8.7% to a target rate of 10.1%, according to Prequin Real Estate. Private sector funds are planning to raise their target from 8% to 9.9%.

A number of recent announcements are indicative of what pension funds are doing. The California Public Employees’ Retirement System (Calpers) is expected to increase investment in real estate by about $6 billion within a year as it begins to exit hedge funds. In mid-2013, Calpers had 8.7% of its fund allocated to real estate. Since then, the allocation has risen to 9.9%, and the fund has set a target of 11% for 2016. The Los Angeles Water and Power Employees’ Retirement Plan is allocating $30 million apiece to four funds, one opportunistic, one value-added and two core real estate funds. A program announced in late October by the New York State Teachers’ Retirement System approved $50 million for a $965 million core-plus fund managed by Rockpoint Group. Another $50 million will be allocated to a Madison Realty Capital vehicle that invests in distressed debt. Rounding out the investment is $40 million for a joint venture with Edens Investment Trust focused on grocery-anchored retail centers. The Maryland State Retirement and Pension System has announced it plans to increase its real estate allocation from 6.9% to 10%. TIAA-CREF is planning to spend upwards of $10 billion annually on commercial property acquisitions and mortgage investing. The fund has typically been doing approximately $4 billion a year in acquisitions and $2.5-4 billion a year in mortgage investing.

Property Transaction Market

Trends in commercial real estate transaction growth are traditionally reported on a “sales dollar volume” basis, rather than on a “number of sales transactions” basis. Unfortunately, if the interest is in gaining insight into the trend associated with the number of deals taking place in the market, reporting the trend on a sales dollar volume basis may be heavily biased by a few high-priced sales transactions.

Insight into the trend in the number of commercial property sales transactions taking place may, however, be gained by reviewing actual property sales data collected and recorded in tax records at municipal offices. CoreLogic currently tracks such data for all major U.S. markets, although there may be a 60 to 90 day lag until the information is reported. As such, CoreLogic routinely corrects data over time based upon the most up-to-date information. This means monthly sales transaction data reported below may vary slightly from data reported previously.

According to CoreLogic, the number of commercial real estate sales transactions in the U.S. since November 2013 is as follows:

CRETransactionsNOTE: The data shown in the graph above only include recorded sales transactions. They do not include leasing transactions (e.g., telecom deals where sites are often leased, properties undergoing refinancing [which may be significant], and property loans being sold or securitized (CMBS)).


Below are tables showing the most active buyers of high-quality properties ($10 million or greater) in the past 12 months (in order of dollar volume acquired) as tracked by Real Capital Analytics.


Italics indicates this buyer has acquired additional properties beyond what was reported in last quarter’s Property Intelligence Report.
Bold indicates a buyer newly added to the list in the quarter.
Regular font indicates no change or a reduction in properties owned/acquired from last quarter’s report.


  1. American Realty Capital Properties (ARCP) REIT1,301 properties
  2. Blackstone Group – 369 properties
  3. JP Morgan – 44 properties
  4. NorthStar Realty Financial – 386 properties
  5. Essex Property Trust – 84 properties
  6. WP Glimcher – 35 properties
  7. Hudson Pacific Properties – 28 properties
  8. TIAA-CREF – 33 properties
  9. Brookdale Senior Living – 210 properties
  10. Norges Bank Investment Management – 6 properties
  11. General Growth Properties (GGP) – 43 properties
  12. Lone Star – 142 properties
  13. Starwood Capital Group – 57 properties
  14. Ventas, Inc. – 118 properties
  15. Thor Equities – 58 properties
  16. MetLife – 23 properties
  17. Invesco Real Estate – 45 properties
  18. DDR – 117 properties
  19. Caisse de Depot – 10 properties
  20. OMERS – 11 properties


  1. Essex Property Trust – 82 properties
  2. Lone Star – 64 properties
  3. Berkshire Property Advisors – 25 properties
  4. Guardian Life Insurance Company – 27 properties
  5. Maximus RE Partners – 2 properties
  6. TruAmerica Multifamily 25 properties
  7. Thor Equities – 35 properties
  8. Invesco Real Estate – 15 properties
  9. TIAA-CREF – 13 properties
  10. Brookfield Property Partners – 5 properties


  1. JP Morgan – 14 properties
  2. Hudson Pacific Properties – 28 properties
  3. Norges Bank Investment Management – 6 properties
  4. Blackstone – 46 properties
  5. OMERS –9 properties
  6. Caisse de Depot – 6 properties
  7. Callahan Capital Partners – 4 properties
  8. David Werner Real Estate – 14 properties
  9. Hines – 14 properties
  10. General Growth Properties (GGP) – 6 properties


  1. NorthStar Realty Finance – 155 properties
  2. American Realty Capital (ARC) Hospitality Trust -131 properties
  3. Anbang Insurance Group – 1 property
  4. Kokusai Kogyo – 6 properties
  5. Blackstone – 92 properties
  6. Brookfield Asset Management – 74 properties
  7. Chatham Lodging Trust – 57 properties
  8. Hilton Worldwide – 9 properties
  9. Strategic Hotels & Resorts – 3 properties
  10. Hyatt Hotels – 3 properties


  1. American Realty Capital Properties (ARCP) REIT – 1,157 properties
  2. WP Glimcher – 35 properties
  3. DDR – 116 properties
  4. Macerich – 11 properties
  5. Kite Realty Group – 59 properties
  6. Blackstone Group – 102 properties
  7. Starwood Capital Group – 13 properties
  8. Kimco – 97 properties
  9. JP Morgan – 5 properties
  10. Simon Property Group – 3 properties


  1. American Realty Capital Properties (ARCP) REIT – 108 properties
  2. Colony Capital – 221 properties
  3. Greenfield Partners – 145 properties
  4. Bay Grove Capital – 48 properties
  5. Exeter Property Group – 60 properties
  6. Abu Dhabi Investment Authority – 2 properties
  7. Blackstone – 116 properties
  8. Clarion Partners – 14 properties
  9. Carter Validus Mission Critical REIT – 7 properties
  10. TPG Capital – 66 properties

 Senior Housing & Care:

  1. Brookdale Senior Living – 201 properties
  2. Northstar Realty Financial – 112 properties
  3. Ventas, Inc. – 58 properties
  4. HCP, Inc. – 23 properties
  5. Northstar Healthcare – 85 properties
  6. Health Care REIT – 53 properties
  7. Sabra Health Care REIT – 39 properties
  8. Senior Housing Properties Trust – 36 properties
  9. ARC Healthcare Trust – 55 properties
  10. Aviv REIT – 55 properties


  1. HFZ Capital Group
  2. Greenland Group
  3. Tishman Speyer
  4. Carmel Partners
  5. Oceanwide Real Estate Group
  6. Crown Resorts
  7. Oaktree
  8. Mitsui Fudosan
  9. Related Companies
  10. Fortis Property Group


  1. Blackstone
  2. Cole Real Estate Investment Trust
  3. Glimcher Realty Trust
  4. BRE Properties
  5. Rockpoint Group
  6. JP Morgan
  7. Goldman Sachs
  8. Beacon Capital Partners
  9. Cerberus
  10. Fortress Investment Group


  1. Deutsche Bank (26.25% market share)
  2. JP Morgan Securities (15.38%)
  3. Wells Fargo Securities (13.7%)
  4. Goldman Sachs (8.83%)
  5. Citigroup (8.42%)
  6. BofA Merrill Lynch (6.87%)
  7. Morgan Stanley (6.75%)
  8. Barclays Capital (4.48%)
  9. UBS (3.85%)
  10. Credit Suisse (2.64%)
  11. RBS (2.31%)
  12. Cantor Fitzgerald (0.29%)
  13. Ladder Capital (0.25%)

 Top Real Estate Development Firms According to Commercial Property Executive Magazine:

  1. Trammel Crow Co.
  2. Hines
  3. Duke Realty
  4. Wood Partners
  5. Liberty Property Trust
  6. Lincoln Property Co.
  7. Alliance Residential Co.
  8. Balfour Beatty Communities
  9. KDC
  10. Camden Property Trust
  11. AMLI Development Co.
  12. Related California
  13. The Rockefeller Group
  14. Brandywine Realty Trust
  15. Brookfield Property Partners
  16. JPI
  17. Edward Rose Building Enterprise
  18. Mack-Cali Realty Corp.
  19. StonebridgeCarras
  20. Block Real Estate Services
  21. Meta Housing Corp.
  22. Washington Property Co.
  23. National Realty & Development Corp.
  24. EastGroup Properties, Inc.
  25. Ramco-Gershenson Properties Trust

    Top Hotel Owners According to Commercial Property Executive Magazine:

  1. Accor
  2. G6 Hospitality
  3. Hilton Worldwide
  4. Host Hotels & Resorts
  5. Hospitality Properties Trust
  6. Hyatt Hotels
  7. Clarion Partners
  8. Apple Hospitality REIT
  9. Ashford Hospitality Trust
  10. RLJ Lodging Trust
  11. Inland American Lodging Advisor
  12. John Q. Hammons Hotels & Resorts
  13. Drury Hotels
  14. TPG Hospitality
  15. Felcor Lodging Trust
  16. Starwood Hotels & Resorts
  17. Sunstone Hotel Investors
  18. TMI Hospitality
  19. Rockbridge
  20. Lasalle Hotel Properties
  21. Diamondrock Hospitality
  22. Summit Hotel Properties
  23. Chatham Lodging Trust
  24. Noble Investment Group
  25. HEI Hotels & Resorts