Property Prices Slip in May But Up Year-Over-Year

Commercial property prices declined slightly in May, but remain higher than a year ago, according to several reports.

Prices declined 10 basis points during May after a healthy 2 percent spike in April, said Ten-X, Irvine, Calif.

The reversal signaled a return to the market flattening seen following the November elections, said Ten-X Chief Economist Peter Muoio. “After a strong April signaled a potential rebound, May represented a clear step back for commercial real estate pricing,” he said. “While the apartment and office sectors continued to post increases, the remainder of the market sunk back into the slump that began following last year’s presidential election.”

Green Street Advisors, Newport Beach, Calif., reported its Commercial Property Price Index decreased by 50 basis points in May. Over the past year, the index has risen only 1 percent as higher cap rates offset growing rental income.

“Cap rates have been creeping higher and that’s been holding back values,” Green Street Senior Analyst Peter Rothemund said. “Pricing of retail and storage properties has been softest, while prices of industrial and medical office buildings continue to reach new highs.”

Ten-X agreed that the retail sector suffered the biggest decline during May, with pricing contracting 1.2 percent in the month. Pricing has now declined during four of the past five months. Retail sector struggles come in part from negative media coverage following high-profile store closings amid the continuing e-commerce encroachment onto brick-and-mortar retail sales, Ten-X said.

Sears announced on Tuesday that it will close an additional 72 stores in addition to the 180 closings it disclosed earlier this year.

The apartment sector, meanwhile, continued its relentless growth by gaining 80 basis points in May, Ten-X said. The segment has now posted 18 consecutive months of growth and pricing is up 15.2 percent in the last 12 months. “Despite tight cap rate spreads and slowing net operating income gains–typically indicators that apartment properties are fully valued–investors continue to flock to the sector,” the report said.

Office pricing grew by 30 basis points in May, joining multifamily as the only sectors to post increases. The sector has now jumped 22.3 percent over the past year, thanks largely to a “robust” labor market that supports office absorption, Ten-X said.

Hotel and industrial property prices both declined during May, continuing their recent struggles, Ten-X said. Industrial prices contracted 60 basis points and hotel prices dipped 20 basis points. Investors cited concerns about growing hotel supply coming to major gateway markets that are already seeing international tourism decline.

“May proved a perfect example of today’s variegated commercial real estate landscape, highlighted by apartment’s continued run-up in pricing and the ongoing uninspired results from the hotel and retail sectors,” Muoio said. “As uncertainty continues to hover around much of the market, we are unlikely to see the across-the-board growth needed to lift it out of its current slump in the near term.”