The capital markets environment remains strong overall, but is less dynamic than the cyclical high reached in 2015. Record-low unemployment rates and healthy property fundamentals have kept the Inland Empire as an attractive market for investors. Capital flows, however, have shifted to secondary and tertiary markets as investors explore alternative sectors and regions for higher yields. Overall, volume remains elevated and pricing is stable.
Tight pricing and limited availability of investable stock dampened total acquisitions activity in Los Angeles, but activity in the Inland Empire picked up from last year. In H1 2017, investment reached $3.3 billion, a year-over-year increase of 6.1%. Individual asset sales, the best indicator for investment momentum, jumped by 15.0% year over year. Much of this investment was driven by strong activity in the office, industrial and hotel sectors, while some of those gains were offset by a slowdown in multifamily investment (-43.1 % year over year). Private buyers were the most active in the IE market, accounting for 63% of the total, and looking for value-add opportunities.
After gradual cap rate compression since 2010, local cap rates have largely stabilized in H1 2017, with prices holding relatively firm. The multifamily and industrial were the only sectors to remain nearly unchanged, while retail and hotel cap rates widened. The general outlook for cap rates and returns on cost in the second half of 2017 is for continued stable pricing.The consensus is that if rates do change in H2 2017, they are more likely to increase modestly.