Analysts Agree: Commercial Price Growth Resumes

Analysts agree: commercial asset prices resumed solid growth in May and June. 

CoStar, Washington, D.C., said both of its two major indexes advanced by more than 1 percent in May, erasing earlier-year declines.

“After the two major indexes backtracked in the first quarter of 2016 amid global economic uncertainty and a seasonal slowdown in investment activity, price growth within the commercial real estate sector during May returned to the average monthly pace set in the previous several years,” CoStar said.

CoStar’s value-weighted index, which reflects sales of high-quality core-market assets, advanced 1.2 percent to its highest level this cycle and the research firm’s equal-weighted index–which weighs each sale transaction equally to capture small deals–rose 1.1 percent in May.

Green Street Advisors, Newport Beach, Calif., said its commercial property price index increased by 1 percent in June. “Although property appreciation has slowed from the pace of prior years, values have risen 2.5 percent so far this year,” Green Street said.

Meanwhile, Moody’s and Real Capital Analytics, New York, said their repeat-sale price index increased by 1.7 percent in May, led by core commercial prices, which rose 1.8 percent. Prices in the smaller apartment sector increased 1.3 percent.

This trend reverses recent patterns. Apartment prices have outpaced core commercial asset prices by about 7 percentage points over the last 12 months, Moody’s and RCA said. Apartment prices grew by nearly 12 percent while core commercial prices rose by nearly 5 percent.

Moody’s/RCA said non-major markets returned nearly 8 percent price growth over the past 12 months, outpacing major-market price growth by nearly 3 percentage points. Major-market price growth continues to outpace that of non-major markets over periods of three years and longer.

CoStar said healthy space absorption contributed to the strong price gains it found. Demonstrating strong overall demand for commercial space, net absorption across the three major property types–office, retail and industrial–could total 688.5 million square feet for the 12-month period ending in June, up 9.5 percent year-over-year.

“Supporting the extension of the pricing recovery across the entire building size and quality spectrum, the general commercial segment, which reflects the performance of smaller properties, had the strongest rate of growth in absorption over the past year,” CoStar said.

Transaction volume continues to trend below 2015’s scorching rate. “Reflecting the broader financial market volatility from earlier in the year, transaction volume remains lower than last year’s record-setting pace,” CoStar said. Composite pair volume of $41.9 billion year-to-date through May was down 13.7 percent compared to the same period one year earlier. Investment-grade properties saw the biggest drop, with transaction volume down 17.4 percent compared to 6.0 percent in the general commercial segment in the first five months of 2016 compared to the same period in 2015.