Commercial Property Price Indexes Diverge

Commercial real estate price indexes from Green Street Advisors and CoStar diverged in March, analysts at the firms said.

Green Street Advisors, Newport Beach, Calif., said its Green Street Commercial Property Price Index decreased by 0.5 percent in March. Green Street Advisors Senior Analyst Peter Rothemund noted that the index has “plateaued” over the past several months as modest cap rates increases offset rental income increases.

“Property values have been going sideways recently, as a creep in cap rates is offsetting healthy top-line growth,” Rothemund said. “Industrial properties are an exception to that trend–cap rates have continued to move lower over the past few months.”

CoStar, Washington, D.C., reported “mixed” results with steady growth at the low end of the commercial real estate market but declining prices for higher-end properties. The firm’s value-weighted composite index, which tracks larger asset sales in core markets, fell 1.4 percent following a similar 1.2 percent decline the month before. Meanwhile, the research firm’s equal-weighted composite index, which reflects more numerous but lower-priced property sales generally seen in secondary and tertiary markets, increased by 1.4 percent.

“While both composite indexes posted positive growth on a year-over-year basis, the recent divergence likely reflects a maturing market cycle, especially for the high-value properties in core markets that led the recovery,” CoStar said.

CoStar noted that composite pair volume showed “modest” growth of $132.2 billion in the 12 months ending in February, 1.9 percent higher than the previous 12-month period. “Still, year-to-date through February 2017, composite pair volume was lower than the same period in both 2015 and 2016, suggesting that the moderation in transaction activity that began in 2016 from 2015 record levels will continue into 2017,” the firm said.

Demonstrating the continued overall demand for commercial space, CoStar projected net absorption in the office, retail and industrial sectors would total 714.3 million square feet for the 12-month period ending in March, a 6.8 percent increase from the same period a year before.

“Supporting the extension of the pricing recovery across the entire building size and quality spectrum, the general commercial segment [which is influenced by smaller, lower-priced properties] saw the strongest rate of absorption growth over the past year, with total net absorption projected to grow 19.1 percent in the 12-month period ending in March,” CoStar said, noting that net absorption in the investment-grade segment, which reflects the price influence of higher-value properties, is likely to expand by 1.2 percent in the same period.