Ten-X: ‘Steady Yet Slowing’ CRE Pricing Growth

Commercial valuations increased by 0.8 percent in September, reported Ten-X, Irvine, Calif.

The firm combined its transaction data with Google Trends data and investor surveys to forecast pricing trends in real time. It found slowing pricing growth across the five commercial real estate sectors, driven largely by declines in the hotel and retail sectors.

“The commercial real estate space still shows a healthy upward pricing pattern, though the market has been unable to keep up with the trends we reported in August, when we saw increases across all five property segments,” said Ten-X Senior Quantitative Strategist Chris Muoio. 

Muoio called this moderation from the summer’s “torrid” pace expected, “[but] the continued softening of the hotel and retail sectors…is worth monitoring for investors,” he said.

Overall CRE valuations remain 6.7 percent higher than a year ago despite the contracting pricing for retail and hotel assets due to rapid growth in July and August, Ten-X reported.

After two stable months, hotel prices contracted by 0.4 percent in September, Ten-X said. It cited an upcoming supply glut and recent challenges from popular short-stay rental services such as Airbnb as reasons for the sectors 7-plus percent price drop over the past year. 

Retail pricing, meanwhile, declined by 0.1 percent, “continuing a run of middling growth that began in mid-2015,” Ten-X said. Pricing remains 6.3 percent higher than this time last year, but its annual growth rate fell to its slowest pace since late 2014. “Concerned investors appear to be hedging their bets by buying up commercial mortgage-backed security derivatives,” the report said.

The industrial sector partially offset hotel and retail declines by posting a 1.8 percent pricing increase in September, Ten-X reported. “Investors remain bullish on the sector as pricing has recovered from a spring swoon and is now at an all-time high,” the report said. 

Much of the industrial sector’s growth may stem from retail’s decline, Ten-X noted, because booming e-commerce simultaneously hurts traditional shopping centers and helps warehouse and distribution centers. “The divergent trends in retail and industrial show one sector’s loss can be another’s gain,” Muoio said. “Despite a tepid global trade climate, industrial continues to thrive as consumers continue to turn away from traditional methods of shopping.”

Apartment property prices continued their steady increase as they increased 1.4 percent in September and now stand 12 percent higher than a year ago. “The sector has once again harnessed the momentum it held through much of 2015 and investors appear to be looking past recent infusions of supply and relying on strong demographics that bode well for its future success,” the Ten-X report said.

The office market showed “tempered” 1.2 percent growth in September, Ten-X said. “Though the mark is relatively modest compared with the sector’s sharp increases over the summer, pricing is now 13.2 percent higher than a year ago and has reached a new peak,” the report said, noting that a solid labor market bodes well for office pricing patterns in the near term.