Direct commercial real estate investment volumes in office totaled US$42 billion in Q2, down just US$500 million from the previous three months. This once again made it the dominant sector at just over 40% of the total, though this is down from 45% in Q1, while retail’s share rose to 33% from 28.5%.

The office sector had the largest share of volumes in both Asia-Pacific (46.5% of the total) and Europe (49%). Its share in the Americas was considerably lower but Centro’s $9 billion-plus portfolio sale to Blackstone in the US is distorting the data; excluding it, offices’ share in the Americas was 38%, down from 42% in Q1 and well below its historical average. The comparable share in other regions was down slightly from 2009 and 2010 levels but not as dramatically. The shift in the US is likely the result of selection bias in terms of what product investors are bringing to market, not least the banks, rather than some sort of decline in the relative appeal of office assets.

There were few super transactions in Q2: only a small share formed part of a portfolio and only three properties had a US$500 million-plus lot size (Deutsche Bank Zentrale in Frankfurt and the Helmsley and former John Hancock buildings, both in Manhattan). In fact, by number, three-quarters of all transactions had a lot size of less than US$50 million. The most active office investment markets globally were the US (US$13.4 billion), the UK (US$5.2 billion) and France (US$2.8 billion). These results are not surprising when you consider the investable office stock of their main markets. The one exception is Japan, where activity in the second quarter was sharply curtailed by March’s natural disasters.

As a proportion of total acquisitions, institutions and corporations showed the highest preference for offices, allocating 57% and 56%, respectively, of their total capital expenditure. This is roughly comparable to previous years, where these shares have ranged between 53% (2010) to 63% (2009). Corporate purchases were most prevalent in Asia-Pacific, with firms purchasing their place of business to mitigate rental liability or to build suitable space to occupy.

Long term, the office sector is gradually surrendering part of its traditional lead to retail. This is both structural and cyclical. Structurally, more investable retail stock is becoming available worldwide at the same time as cross-border investors become more experienced with the perceived complexity in managing retail properties, particularly shopping centers. Cyclically, retail properties benefit from more favourable dynamics than offices in a low employment growth economy. Furthermore, retail’s lease structures offer some inflation protection. These facts will not erode in H2, though long-term outperformance of these assets will depend on a recovery in income, and therefore jobs growth.

Retail’s prominence, however, was exaggerated in Q2. Portfolio deals dominated retail volumes, accounting for 44% of the sector total, against only 7% for offices. Centro’s portfolio sale to Blackstone was once again significant though there were other large portfolio deals. Thus, while we expect retail’s share in overall volumes to rise long term, its exceptional share this quarter will likely erode in the second half.

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