Headwinds Facing Office REITs

A recent article by Green Street Advisors has a good point about offices in general while providing a picture of the valuation of the office segment:

Source: Headwinds in Office Real Estate: A Sector in Transition

And a Bloomberg chart about the performance of the Bloomberg Office Property Index in the last 12 months as of the close of 10/25:

Source: Bloomberg

The index is at a critical point, attacking the green resistance line. As the office sector is a quite big component of REIT ETFs and Indexes, a break above this trendline could be a game changer.

 

European Property Returns

A new research piece came out from Colliers giving an overview of the European property markets:

Source: CAPITAL FLOWS EMEA QUARTER 3 | 2018

Berlin, Frankfurt and Madrid are red hot markets across the three sectors, and London looks pretty decent in Logistics and Retail despite Brexit.

Source: CAPITAL FLOWS EMEA QUARTER 3 | 2018

Prime yields in the core countries have been basically flat in the last two years, while their spread to government bonds have shrunk.

Could this be the end of the fall in prime yields?

Real Estate Cap Rates

While transaction volumes are declining, the trend is still shifting towards lower cap rates:

Source: H1 2018 U.S. Investment Outlook

Industrial cap rates are stabilizing, while the increasing Treasury yield is eroding their yield premium:

Source: H1 2018 U.S. Investment Outlook

Hotels still command the highest cap rate among the segments in the US:

Source: H1 2018 U.S. Investment Outlook

US Commercial Real Estate Transaction Volumes

Transaction volumes of US commercial real estate increased by 3.4 percent compared to the first half of 2017. At the current pace, 2018 will mark the third consecutive year of decline in volumes.

Source: H1 2018 U.S. Investment Outlook

The most interesting trend is the strong growth in industrial properties and the decline in the office sector. This corresponds to their respective price performance lately.

Source: H1 2018 U.S. Investment Outlook

And finally the share of non-US buyers in each segment, where the total is in line with 2017:

Source: H1 2018 U.S. Investment Outlook