CRE Valuation Growth Slows in March

March 31, 2016

Commercial valuations increased 19 basis points in March–the slowest annual increase since the end of 2014–reported Ten-X, Irvine, Calif.

Ten-X Chief Economist Peter Muoio said the increase actually masks weakness in all property segments except for apartments. “While our all-segment [figure] is down slightly from its end-of-year 2015 level, the apartment sector is enjoying strong pricing on the Ten-X platform as there has been positive traction from investors who like the direction apartment cap rates are heading,” he said.

While all other property segments either held steady or fell in March, apartment valuations increased a solid 233 basis points in March–the sector’s strongest gain since last May, Muoio said. Apartment valuations rose 9.5 percent year-over-year, putting the sector in solid positive territory for first-quarter 2016.

Muoio said declines in the hotel and office segments “raised eyebrows” in March. Hotel valuations dropped 124 basis points, signaling the fifth-straight monthly decline and leaving the sector up only 2.6 percent year-over-year.

Office valuations also dipped in March, Muoio said. They fell 14 basis points from February, and are up just 2.2 percent from their year-ago level, marking the sector’s weakest annual gain in this cycle. “There are indications that office rents are weakening even in some of the hotter markets while many non-tech markets also continue to drag,” he said.

Meanwhile, the retail and industrial sectors remained flat in March, Ten-X said. But retail valuations grew a solid 8.7 percent year-over-year and industrial valuations increased 17.1 percent year-over-year. “The industrial sector stands out from the other sectors as it benefits from technology-driven economic shifts,” Muoio said.

Institutional investors expect an 8.5 percent total return in 2016, composed of a 4.9 percent income return and a 3.7 percent appreciation return, the Pension Real Estate Association’s Consensus Forecast survey said.

Looking further ahead, institutional investors expect a 6.9 percent total return in 2017 and a 5.7 percent return in 2018, PREA reported.