The capital markets environment remained strong overall, but less dynamic than the cyclical high reached in 2016. Record-low unemployment rates and healthy property fundamentals make Los Angeles a particularly attractive market for investors. Capitalflows, however, shifted to secondary and tertiary markets as investors explored alternative sectors and regions for higher yields. Overall, volume eased slightly and pricing stabilized.
Tight pricing and limited availability of investable stock dampened total acquisitions activity but it remained elevated compared with long-run averages. In H1 2017, investment reached $13.0 billion, a year-over-year decline of 12.9%, but on par with 2014 and 2015 levels. Individual asset sales, the best indicator for investment momentum, declined by only 2.5% year over year. Los Angeles ended H1 2017 as the largest market in the nation by total volume, surpassing Manhattan, the perennial leader.
Cross-border buyers actively invested in Los Angeles real estate and represented 14.0% of total acquisitions in H1 2017. Canada became the largest foreign investor in Los Angeles, accounting for over half of international capital. Qatar, China and Germany were also large sources of capital.
After gradual cap rate compression since 2010, local cap rates largely stabilized in H1 2017, with prices holding relatively firm. Industrial was the only sector in Los Angeles with tightening cap rates, while the office and multifamily sectors remained unchanged and retail and hotel cap rates increased. The outlook for cap rates and returns on cost in the second half of 2017 is for continued stable pricing. If rates do change in H2 2017, a modest increase is likely.