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Property prices continue to hit new highs across sectors, though the rate of price growth has slowed noticeably. High valuations and an economic expansion that is now a decade long have started to take their toll on price appreciation. While price growth has picked up modestly over the past few months, current year-over-year growth of 7.14% sits below 3-year and 5-year annualized numbers. A notable exception is the industrial sector, which continues to be the top-performing area of the CRE market as demand has consistently outstripped new supply.1

Transaction volume moderated during the first part of 2019 as investors may have gotten skittish following financial market volatility in Q4 2018. April saw the lowest monthly transaction volume since February 2017, and 2019 volume is currently 11% below last year’s pace at this time.1 While we look for continued economic and policy uncertainty to potentially hamper transaction volume going forward, high occupancy rates and solid rent growth should continue to support prices.

Cap rates remain near all-time lows across major sectors, though declines have mostly leveled off over the past few years. Cap rates for each major sector are within 15 bps of their levels from a year ago.1 The 10-year U.S. Treasury yield has fallen more than 60 bps since the beginning of the year, which has supported cap rate levels but has not yet driven any significant further compression.2 With heightened economic uncertainty likely for the rest of the year, we see cap rates contributing minimally to price growth.

With asking rents having leveled off, volumes declining and cap rates steady, we see a market that is healthy but showing the classic signs of entering a late-cycle phase. Declining interest rates have caused cap rate spreads to the 10-year Treasury to widen somewhat, though spreads for each major sector remain below expansion averages. While lower rates could help drive cheaper debt financing, growing economic uncertainty has started to put a cap on further valuation increases. The rest of 2019 will likely continue this trend, and income will drive an increasingly higher percentage of returns.1,3

1 Real Capital Analytics, as of May 31, 2019.
2 Bloomberg, as of May 31, 2019.
3 Reis, as of March 31, 2019.

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