National Association of REALTORS®

COMMERCIAL REAL ESTATE

MARKET TRENDS: Q4.2017
Commercial Real Estate Market Trends: Q4.2017

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does not guarantee its accuracy, and such information may be incomplete. This report is for
information purposes only.

2
 COMMERCIAL REAL ESTATE MARKET TRENDS | Q4.2017
February 2018

NATIONAL ASSOCIATION OF
REALTORS®
2018 LEADERSHIP TEAM

President
Elizabeth J. Mendenhall , ABR, ABRM, CIPS,
CRB, GRI, ePRO, LCI, PMN

President-Elect
John S. Smaby

First Vice President

Vince E. Malta

Treasurer
Thomas A. Riley, CCIM, CRB

Immediate Past-President
Bill E. Brown

Vice President
Colleen A. Badagliacco, CRB, CRS, ePro,
GRI, SRES

Vice President
Kenny Parcell, ABR, BB, CRS

Chief Executive Officer

Bob Goldberg

NATIONAL ASSOCIATION of REALTORS® | RESEARCH | www.nar.realtor/research-and-statistics 3

 COMMERCIAL REAL ESTATE MARKET TRENDS | Q4.2017
February 2018

CONTENTS

1 | Introduction……………………………………………………………………………………………. 5

2 | Investment Sales..………………………………………………………………………………….. 6

3 | Leasing Fundamentals .…………..……………………………………………………………… 10

4 | Methodology………………………………………………………………………………………….. 13

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 COMMERCIAL REAL ESTATE MARKET TRENDS | Q4.2017
February 2018

Introduction

Commercial space is heavily concentrated in GEORGE RATIU

large buildings, but large buildings are a Managing Director, Housing &
relatively small number of the overall stock of Commercial Research
commercial buildings. In terms of inventory, gratiu@realtors.org
commercial real estate markets are bifurcated,
with the majority of buildings being relatively
small, while the bulk of commercial space is
concentrated in larger buildings.

The bifurcation continues along transaction

volumes as well, with deals at the higher end—
$2.5 million and above—comprising a large
share of investment sales, while transactions at
the lower end make up a smaller fraction.

Data are readily available for transactions in

excess of $2.5 million from several sources,
including Real Capital Analytics (RCA).
However, in general, data for smaller
transactions—many of which are intermediated
by REALTORS®—are less widely available.
National Association of REALTORS®’ (NAR)
Commercial Real Estate Market Trends gathers
market information for small cap properties and
transactions, mostly valued below $2.5 million.

Q4.2017 Update

The fourth quarter of 2017 marked an

acceleration in REALTORS®’ market trends.
Sales volume advanced at a solid 9.1 percent,
as cap rates closed the year 10 basis points
higher from 2016. The shortage of available
inventory remained the principal concern for
investors, as a wide pricing gap between buyers
and sellers affected over 20 percent of
respondents. Prices gained 6.9 percent year-
over-year. Leasing activity maintained its growth
trajectory as vacancies declined.

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 COMMERCIAL REAL ESTATE MARKET TRENDS | Q4.2017
February 2018

INVESTMENT SALES
Q4.2017 Percentage of REALTORS® Sales Volume Sales Prices
30%
Who Closed a Sale Transaction

75%
20%

10%

Percent Change, year-over-year

0%

2008.Q4
2009.Q2
2009.Q4
2010.Q2
2010.Q4
2011.Q2
2011.Q4
2012.Q2
2012.Q4
2013.Q2
2013.Q4
2014.Q2
2014.Q4
2015.Q2
2015.Q4
2016.Q2
2016.Q4
2017.Q2
2017.Q4
-10%

-20%
Q4.2017 Average Transaction Value

$1.5 million
-30%

-40%

-50% Source: National Association of Realtors®

Q4.2017 Investment Q4.2017 Investment

Volume Prices

+9.1% +6.9% Current market not showing indications of slowing and

should remain strong for the next 18 months.

Industrial is still very strong. Some Bitcoin mining

South in VA, demand is outstripping supply. Land prices
up. In Ohio, Michigan, key cities like Columbus, Grand
Rapids, sections of Detroit and Traverse City, there is
much activity. Burgeoning rural areas are ones that have
new jobs and housing stock that is ready to go. Trend
will be rental with the new tax code.
Far-flung suburban Chicago is simply not a place where
anything major seems to be happening, or planned to
happen, so our market just plods along while much of the
rest of the country, including urban Chicago has had
some very strong years.
tenants (new to market) and retail is still going well in
strip centers.
Looks to be continued growth as the population is
projected to grow from our current 2.3 Million in our
MSA to a 4.0 million by 2033.
Market in this rural town is very distressed due to septic
issues and the construction of large corporation
businesses like Dollar General, Walmart distressing the
small business even more.
San Antonio is a good, solid market. Not too much
growth—no boom and bust.

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 COMMERCIAL REAL ESTATE MARKET TRENDS | Q4.2017
February 2018

INVESTMENT SALES

2017 was down across the board in every food group
with exception of larger REIT transactions. Specialty
transactions such as self-storage are transitioning to new
construction, which I expect will overtake existing
general industrial user buildings in 2019.
Multifamily is very strong. Lots of buyers, local and from
outside of market (mostly). Not enough sellers.
Industrial is fairly strong, too. Office and retail OK but
not overly strong (other than new retail construction
which is strong).

Current market is strong, advancing year over year at a
healthy pace, but quarterly we saw a slight decrease in
activity mostly due to seasonal factors. Some growth
areas such as Springdale, have neighborhoods poised for
rapid growth and price increases, but, as of yet, the value
increases are mostly anticipatory as infrastructure is
built. We anticipate increasing prices in these areas, but
there is not much evidence to say specifically how much
of the anticipated gains will be realized and how quickly.
The market is energized, but the gap between what the
buyer wants and can afford and the seller is upside down.
We are seeing a surge in activity and interest since late
2015. People are excited about the new tax reform,
although in actuality, it does nothing to address the key
problems with the tax code as it relates to real estate
investment.

Buyers are looking for "deals". There are "no deals," just
fair deals today -- but I'm concerned of another "bust"
not as bad as before, but "this engine keeps on running".
New Industrial warehouses are trying to lease at $5.50-
$6.00/sf NNN; cost of construction is high. Northwest
Sale Prices (YoY % Chg)
Arkansas Market Real Capital Analytics CRE Markets
REALTOR® CRE Markets
20.0%

10.0%

REALTORS® Q4.2017 Prices

0.0%
Office Class A($/SF) $149
Office Class BC ($/SF) $106
-10.0%
Industrial Class A ($/SF) $84
Industrial Class BC ($/SF) $65
-20.0%
Retail Class A ($/SF) $141
Retail Class BC ($/SF) $105
-30.0%
Apartment Class A ($/Unit) $55,730
Apartment Class BC ($/Unit) $50,685
-40.0% Sources: NAR, Real Capital Analytics
Source: National Association of REALTORS®

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 COMMERCIAL REAL ESTATE MARKET TRENDS | Q4.2017
February 2018

INVESTMENT SALES

REALTORS® Commercial Capitalization Rates Q4.2017 REALTORS® with

13%
Office Industrial Retail International Transactions
Multifamily Hotel
12.0%

11.0%

10.0%

9.0%

8.0%

7.0% Q4.2017 Average International

Transaction Value

$1.2 million
6.0%

5.0%
2014.Q1
2010.Q1
2010.Q3
2011.Q1
2011.Q3
2012.Q1
2012.Q3
2013.Q1
2013.Q3

2014.Q3
2015.Q1
2015.Q3
2016.Q1
2016.Q3
2017.Q1
2017.Q3

Source: National Association of Realtors®

REALTORS® Q4.2017 Cap Rates

Office Class A 6.7 %
Office Class BC 7.5 %
Industrial Class A 6.6 %
2017 Cap Rate in REALTORS® Markets

7.2%
Industrial Class BC 7.6 %
Retail Class A 6.5 %
Retail Class BC 7.6 %
Apartment Class A 6.0 %
Apartment Class BC 6.9 %
Hotel Class A 6.9 %
Hotel Class BC 7.5 %
Source: National Association of REALTORS®

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 COMMERCIAL REAL ESTATE MARKET TRENDS | Q4.2017
February 2018

INVESTMENT SALES

Appraisers’ Familiarity with Market Appraisers’ Familiarity with Property Type

Always 27% Always 34%

Sometimes 63% Sometimes 59%

Rarely 9% Rarely 7%

Never 1% Never 1%

Regarding appraisers, our core local appraisers are solid Regarding appraisers, appraisers should be local and
and I share data with them. Appraisers from more distant know the local market. They should NOT be allowed to
locations struggle with understanding our market. work in a market they are not familiar with.

Q4.2017 Market Conditions

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 COMMERCIAL REAL ESTATE MARKET TRENDS | Q4.2017
February 2018

LEASING FUNDAMENTALS
Q4.2017 Percentage of REALTORS® New Construction Leasing Volume
15%
Who Closed a Lease Transaction

65%
10%

5%

% Change, Quarter-over-quarter
0%

2009.Q2
2009.Q4
2010.Q2
2010.Q4
2011.Q2
2011.Q4
2012.Q2
2012.Q4
2013.Q2
2013.Q4
2014.Q2
2014.Q4
2015.Q2
2015.Q4
2016.Q2
2016.Q4
2017.Q2
2017.Q4
-5%

-10%

-15%
Q4.2017 Leasing Q4.2017 Leasing
Volume Rates -20%

+5.3% +3.3% -25%

-30% Source: National Association of Realtors®

REALTOR® Commercial Leasing Trends REALTORS® Q4.2017 Rents

Office $31 / Sq.Ft.
Leasing Volume Leasing Rates Industrial $23 / Sq.Ft.
20% Retail $37 / Sq.Ft.
Multifamily $1,106 / Unit
10%

Average lease term during last transaction (%)

0%
2009 2010 2011 2012 2013 2014 2015 2016 2017
60 + months
-10%
60 months
48 months
-20%
36 months
-30% 24 months
12 months
-40%
0 - 11 months

-50% Source: National Association of Realtors® 0 10 20 30 40 50

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 COMMERCIAL REAL ESTATE MARKET TRENDS | Q4.2017
February 2018

LEASING FUNDAMENTALS
REALTORS® Commercial Vacancy Rates REALTORS® Q4.2017 Vacancy Rates
Office 12.0 %
Office Industrial Retail
Industrial 7.8 %
Multifamily Hotel Retail 11.4 %
30.0%
Multifamily 5.0 %
25.0% Hotel 13.7 %

20.0%
It seems that people are ready to spend money on their
15.0% businesses. We are seeing a lot of activity in the leasing
market.
10.0% Retail is going through a period of consolidation, even in
major MSAs. Apartments show continued vigor and still
5.0% not good product for homeowners and investors to buy.

Tenants are leaving Connecticut for Boston and other

0.0% locations. Gov's got to go!
2017.Q3
2010.Q1
2010.Q3
2011.Q1
2011.Q3
2012.Q1
2012.Q3
2013.Q1
2013.Q3
2014.Q1
2014.Q3
2015.Q1
2015.Q3
2016.Q1
2016.Q3
2017.Q1

Source: National Association of Realtors®

Average Leased Space by Size, Quarterly*

100%

90%

80%

70%
Over 100,000 sf
60%
50,000 - 100,000 sf
50%
10,000 - 49,999 sf
40% 7,500 - 9,999 sf
30% 5,000 - 7,499 sf
20% 2,500 - 4,999 sf
10% Under 2,500 sf

0%
2009.Q1

2011.Q4

2017.Q3
2008.Q4

2009.Q2
2009.Q3
2009.Q4
2010.Q1
2010.Q2
2010.Q3
2010.Q4
2011.Q1
2011.Q2
2011.Q3

2012.Q1
2012.Q2
2012.Q3
2012.Q4
2013.Q1
2013.Q2
2013.Q3
2013.Q4
2014.Q1
2014.Q2
2014.Q3
2014.Q4
2015.Q1
2015.Q2
2015.Q3
2015.Q4
2016.Q1
2016.Q2
2016.Q3
2016.Q4
2017.Q1
2017.Q2

2017.Q4

*Prior to 2010.Q4 "Under 5,000 sf was the lowest category available. Source: National Association of Realtors®

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 COMMERCIAL REAL ESTATE MARKET TRENDS | Q4.2017
February 2018

LEASING FUNDAMENTALS
REALTORS® Most Pressing Challenges Direction of Business Opportunity (QoQ)
100% 8%

90% 6%
Inventory
80% Shortage
42% 4%
46%
Pricing Gap:
70% Buyers vs Sellers 2%

60% Local Economy

0%

2016.Q2
2008.Q4
2009.Q2
2009.Q4
2010.Q2
2010.Q4
2011.Q2
2011.Q4
2012.Q2
2012.Q4
2013.Q2
2013.Q4
2014.Q2
2014.Q4
2015.Q2
2015.Q4

2016.Q4
2017.Q2
2017.Q4
50% Financing
23% -2%
21%
40%
Other -4%
30% 9% 13%
National Economy -6%
20%
12% 8%
-8%
Distressed
10% 10% Properties
10% -10%
1% 3%
0%
2017.Q4 2017.Q3 -12% Source: National Association of Realtors®

Q4.2017 Market Opportunities

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 COMMERCIAL REAL ESTATE MARKET TRENDS | Q4.2017
February 2018

Methodology

The REALTORS® Commercial Real Estate Market
Trends measures quarterly activity in the
commercial real estate markets, as reported in a
national survey. The survey collects data from
REALTORS® engaged in commercial real estate
transactions. The survey is designed to provide an
overview of market performance, sales and leasing
transactions, along with information on current
economic challenges and future expectations.
In January 2018, NAR invited a random sample of
63,269 REALTORS® with an interest in commercial
real estate to complete an on-line survey. A total of
933 complete responses were received, for an
overall response rate of 1.5 percent. The main
measure of central tendency employed in the
analysis is the mean.

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The National Association of REALTORS®, “The Voice for Real Estate,” is America’s
largest trade association, representing 1.3 million members, including NAR’s institutes,
societies and councils, involved in all aspects of the real estate industry. NAR
membership includes brokers, salespeople, property managers, appraisers, counselors
and others engaged in both residential and commercial real estate. The term
REALTOR® is a registered collective membership mark that identifies a real estate
professional who is a member of the National Association of REALTORS® and
subscribes to its strict Code of Ethics. Working for America's property owners, the
National Association provides a facility for professional development, research and
exchange of information among its members and to the public and government for the
purpose of preserving the free enterprise system and the right to own real property.

NATIONAL ASSOCIATION OF REALTORS®

RESEARCH GROUP

The Mission of the National Association of REALTORS® Research Group is to collect

and disseminate timely, accurate and comprehensive real estate data and to conduct
economic analysis in order to inform and engage members, consumers, and policy
makers and the media in a professional and accessible manner.

To find out about other products from NAR Research, visit www.nar.realtor/research-
and-statistics.

NATIONAL ASSOCIATION OF REALTORS®

RESEARCH GROUP
500 New Jersey Avenue, NW
Washington, DC 20001
202.383.1000
COMMERCIAL REAL ESTATE MARKET TRENDS: Q4.2017