CRE Prices Slow at Year-End
Commercial real estate prices ended 2017 on a down note, reported Ten-X, Irvine, Calif.
Nationwide, commercial pricing edged down 0.3 percent in December from November figures–the eighth consecutive month of contraction, Ten-X Commercial said. The pricing gauge is now just 1.0 percent higher than a year ago.
“Commercial real estate pricing has continued to weaken with year-over-year pricing growth now at its lowest point in the cycle,” Ten-X Chief Economist Peter Muoio said. “Despite positive economic news and a new tax law that should benefit commercial real estate, investor sentiment has been quite weak.”
Peter Rothemund, Senior Analyst with Green Street Advisors, Newport Beach, Calif., said 2017 property pricing was generally flat in aggregate, “but it really depends on the type of property,” he noted. “Industrial, manufactured home parks, life science and medical office have all gained 10 percent or more over the past year, while mall values are down that much. Everything else falls somewhere in between.”
Ten-X said the national retail sector posted a monthly gain, which it called a “surprising” result given the ongoing challenges that faces from e-commerce and shifts in consumer spending preferences. The retail sector index recorded a 0.4-percent rise in December, its seventh consecutive monthly gain. But the sector’s annual pricing growth shrank to 4.3 percent.
Office pricing–which had seen gains in recent months despite weak fundamentals–dropped 1.6 percent in December, Ten-X reported. “The sector’s weakness was universal across all regions, encompassing markets that never recovered from the last recession’s job losses and markets where strong recovery drove new construction, resulting in increased supply pressuring vacancy rates.”
The formerly high-flying apartment sector continued to weaken, Ten-X said. It posted a 0.3 percent decline in December–the sixth consecutive monthly drop–to leave apartment pricing just 2.6 percent higher than a year ago.
The hotel sector continues to “bounce around” with the index increasing 0.8 percent in December. Hotel pricing is now 2 percent higher than a year ago, its strongest annual reading since May, Ten-X said. It credited a range of factors including improving consumer and business travel indicators, a weaker dollar that makes U.S. travel cheaper for foreigners and improved economic conditions abroad for boosting hotel prices. “That said, the threat of increased development means pricing is threading a course through conflicting supply-demand signals,” the report noted.
Muoio said the industrial sector recorded a 0.6-percent monthly decline in December and industrial pricing is down 3.5 percent compared to a year ago–the weakest annual pricing movement among all five sectors. “The sector is enjoying strong fundamentals and is supported by traditional demand drivers like industrial production and capital goods orders as well as new sources of demand, including e-commerce growth [and] demand from cloud computing centers,” the report said. But with supply picking up, investors may worry about the speed with which industrial supply will enter the market and have seemingly begun to hedge their bets on the segment.
“The continued decline in December confirms that commercial real estate investors are wary,” Muoio said. “Even segments like industrial and apartment, which seemed to have limitless potential just months ago, have seen marked pricing declines due to supply and other concerns. With pricing across all segments up just 1.0 percent in the past year, the question of whether pricing will pick up in 2018 or continue its sluggish performance remains to be seen.”
