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The table below shows the total U.S. annual sales volume of commercial real estate by property type for 2011 and 2012. While sales of all property types were up 13.5 percent, the largest gainer was apartments, which is not surprising given the impact of now more stringent loan underwriter standards, 20 percent down payments and $1 trillion of student loan debt. This continues the megatrend from owning to renting. When comparing 2011 to 2010, the only property type not to increase sales volume year-over-year was land. Given minimal new developments since 2006, I expect land sales in 2013 to increase even more than the 22.6 percent posted in 2012. Declines in sales from 2011 to 2012 were found in two property types, other (which is heavily medical oriented), and the hospitality industry. Economic uncertainty remains a stigma for expansion in the hospitality segment, but when economic uncertainty among consumers is resolved, this segment will come roaring back.
While the dollar volume of total commercial real estate sales remains 38 percent off the all-time peak seen in 2007, it grew an impressive 13.5 percent in 2012. Commercial real estate has recovered at a much faster pace than housing, and remains positioned to continue these trends into 2013.
The reason for the growing transactions is pure and simple. Commercial real estate, since 2000, has outperformed the stock market (Dow Jones Industrial Average and the S&P500), on an average annual yearly return. Based on the National Council of Real Estate Fiduciaries (NCREIF), commercial properties of all types topped the average annual returns since 2000. For information on NCREIF and a description of their data, see my previous blog at Annual Physical Results For Commercial Real Estate The Patient Is Doing Extremely Well.
The following table shows the 2012 return (the change in the property value plus the cash flow from the property) vs. the average annual return from 2000 through 2012. Three of the five property types posted double-digit returns in 2012. All five property types in 2012 performed better than their average since 2000. In sharp contrast, the 10-Year U.S. Treasury Bond posted an average annual yield of 1.80 percent in 2012. While real estate is without question a riskier investment, commercial real estate investors reaped attractive returns in 2012.
And my expectations for 2013? MOTS — More Of The Same.