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Here's What's Happening In The Market, Here’s What This Means For You
Cap Rates and the ‘Big Squeeze’
An examination of real estate cap rates over the 2001-2021 period, and more specifically for the 2010-2021 period, reveals that for virtually all major property types tracked by Real Capital Analytics, the fourth quarter of 2021 marked the lowest point for cap rates since the turn of the millennium. Apartments registered an average cap rate of 4.7 percent at the end of 2021. Industrial assets were priced at a 5.7 percent cap rate. Even the troubled retail sector was at a historical low of 6.4 percent, as were suburban offices. Only office buildings and hotels were above their historically lowest cap rates—and even these were so, only slightly.
We are seeing, in other words, a dramatic squeeze on the risk premium available in commercial property investment. To be sure, investors are buoyed by the rising prices that are the consequence of cap rate decline. Transaction volume reported by RCA was up 88 percent in 2021 compared with 2020, reaching an all-time high of $808.7 billion, and prices rose 23 percent. Investor appetite has been robust. In this sense, commercial property is sharing in a capital-fueled asset pricing boom, which has also seen the stock market and single-family home prices increase simultaneously. The first question that comes to mind is: Can it continue? And then the second question is: Are investors being adequately compensated for risk?
Since the COVID impact has subsided, the stunning rebound in property transactions and pricing should be taken with restrained enthusiasm. Risk cannot be avoided but needs to be managed. It needs to be priced also, and that’s a nagging worry in early 2022.
The Pulse of the Market
Expired listings have trickled down to nearly zero in most areas. This means, if you put your property on the market it will most likely sell. If not, it’s probably overpriced. Orange County, Long Beach, and LA County are seeing strong weeks of closed transactions. The number of active listings has either held steady or seen a very small increase in most areas. We’re still seeing a lot of transactions sell at the asking price or above which means investors still need to be aggressive in their offers if they hope to beat out other investors for an attractive property.
What to Expect:
The anticipated increase of interest rates, inflation and the war in Ukraine hasn’t had much of an effect on the market so far. But with gas prices headed upward, it will definitely affect the market and economy as everything gets more expensive. How soon is anyone’s guess? I think the anticipated interest rate increase is fueling investor demand right now. Maybe we will see a little bit of a slowdown in activity once the first and second anticipated increases in interest rates become reality.
Orange County
Orange County multifamily sales had a good week last week with 17 Closed Sales. All Closed Sales Last Week consisted of 2-4 units. The Closed Sales Average Days on Market was extremely low at just 17 days. There were 11 of the 17 Closed Sales Last Week that were Transactions Sold At or Above Asking Price and 7 of the 17 Closed Sales Last Week were All Cash Transactions. The monthly Absorption Rate was down from 1.86 months previously to 1.7 months currently. The monthly Average Cap Rate went down to 4.42% from 4.35% previously.
Looking at the monthly charts the Days to Sell Average was up slightly to 35 days but still well within the norm over the last 9 months. The Number of Active Listings dropped to a new low at 155 active listings but was almost unchanged from the previous month. The monthly Number of New Listings was down slightly from the previous month. The monthly Number of Sales was also down slightly from the previous month.
Orange County multifamily had 14 New Listings Last Week. The weekly Total Number of Active Listings is unchanged from the previous week at 87 total active listings. The Months of Inventory is also unchanged at 3 months.
List of Closed Sales
Southern California
Long Beach multifamily had 12 Closed Sales Last Week. This is identical to the previous week’s closed sales. The Closed Sales - Average Days on Market was at 44 days. This stat continues to fluctuate between 30-45 days each week. Of the 12 Closed Sales Last Week there were 7 Transactions That Sold At or Above the Asking Price. There was just 1 All Cash Transaction Last Week. The monthly Absorption Rate increased from 1.84 months previously to 2 months currently.
Looking at the monthly charts the Days to Sell Average dropped to its lowest point in almost 4 years to just 27 days. The Active Listings Number was back down to 120 total active listings, matching the previous low in December of last year. The Number of New Listings was down slightly from the previous month but twice as many as there were 2 months ago when there were only 20 new listings in the month of December 2021. The Average Price Per Sq. Ft. dropped but was still in the range it’s been in over the last 6-9 months. The Number of Sales dropped to just 28 total sales. This is just 1 closed sale higher than the previous low of 27 closed sales in February last year.
Back to the weekly stats - Long Beach multifamily had 8 New Listings Last Week. This brings the Total Number of Active Listings to 58 total listings. This is up from 53 total listings in the previous week. Months of Inventory was unchanged at 4 months.
List of Closed Sales