Is US Refinance Activity Causing Sticky Prices?

By Elizabeth Szep, Real Capital Analytics

Since early 2015 the proportion of U.S. loan volume dedicated to property acquisitions has been steadily decreasing as the proportion of refinancing loans has been growing. That owners are increasingly opting to refinance illustrates the pullback in the supply of stock that may be contributing to sticky prices.

The proportion of property acquisition loans has fallen from a 55% share at the start of 2015 to a 39% share in the first quarter of 2018, based on 12-month trailing data. The overall volume of sales transactions has been declining over the same timeframe: sales volume for the 12 months through Q1’18 was down 9.4% compared to Q1’16. Despite those declines, commercial property prices have risen a cumulative 16% over the past two years.

So long as owners can easily refinance their properties, buyers will continue to compete for a smaller pool of assets and prices will remain high. If this is the case, yield hungry investors will need to concede to this price change if they want to be active in the commercial real estate market.

Despite interest rate increases, a strong economy and continued wage growth should translate to increased net operating income (NOI) for owners, helping to offset some of those cost of capital increases to keep refinancing a viable option. Additionally, 2017 saw an uptick in lender diversity, and that increased competition may also help to keep the cost of capital down.

On the flip side, if interest rates and the cost of capital increase too quickly compared to NOI, owners may face fewer options to refinance and some may need to test the market pricing through asset sales.

RCA CPPI results for May will be available to clients on June 20 with the publication of US Capital Trends, and publicly available on June 21. To learn more about the RCA CPPI (Commercial Property Price Indices) and to sign up for reports visit rcanalytics.com.