Ten-X: ‘Minimal’ Valuation Growth in March

Commercial valuations grew by just 0.1 percent nationwide during March–and just 0.5 percent since November–reported Ten-X, Irvine. Calif.

“The robust growth that characterized most of 2016 has now entered a prolonged slump, coinciding with the presidential election and federal interest rate hikes,” the Ten-X Commercial Real Estate Nowcast report said. But it noted that pricing across commercial real estate sectors has increased 8.4 percent over the last 12 months.

The apartment sector remained the industry’s bright spot, posting 1.2 percent growth in pricing during March. The sector has now increased 15.4 percent over the past year. “Its continued growth comes despite stabilized fundamentals, tighter cap rate spreads and rising interest rates, all of which had suggested that apartment properties might be priced to perfection,” the report said. Multifamily’s only weak spot was in the west; March brought particularly strong gains in the Midwest and northeast.

“All signs appeared to be pointing toward a slowdown in apartment valuations, but the sector has again demonstrated its resiliency by posting additional pricing gains,” said Ten-X Chief Economist Peter Muoio. “While pricing in other commercial real estate segments has stagnated due to economic uncertainty and shifts in consumer behavior, so far investors remain very active in this segment.”

The industrial sector saw a small 0.2 percent increase in March to join multifamily as the only sectors to show growth during the month. The uptick marked the second straight month of growth for industrial, which has seen pricing increase 5.2 percent over the last year. “Investors continue to view the segment favorably, owing largely to the industrial demand generated by e-retail and cloud computing,” the report said. “Uncertainty has risen around major port-related industrial properties due to potential federal policy changes, but that has yet to have any major impact on the market. Pricing trends varied geographically, with all regions but the northeast moving up or down a few basis points.”

Both office and retail sectors saw pricing slip during March, posting declines of 0.1 percent and 0.3 percent, respectively. Both sectors have “moved sideways” since November, Ten-X said, and retail has now contracted slightly in each of the last three months. The office sector remains up a “stunning” 22 percent from a year ago, Ten-X noted, but it said this reflects weakness in office pricing in early 2016 rather than the sector’s overall health. “Google search trends were decidedly negative for the office segment in March, while data from transactions on the Ten-X marketplace was also discouraging,” the report said.

Hotel sector prices fell 1 percent in March, Ten-X reported. Pricing across the segment is now down 4.7 percent year-over-year and 11 percent from its fall 2015 peak. “A closer look, however, reveals a more nuanced picture across regional lines as overall declines were driven largely by drops in the northeast and west,” the report said. Those regions contain several global gateway markets adversely affected by a strong dollar and impediments to foreign travel to the U.S., as well generally robust supply pipelines. Other regions, particularly the southeast, posted gains during March.

“Now four months removed from the presidential election, commercial real estate valuations remain in a lull as investors await more certainty on both the economy and the potential for sweeping federal policy changes,” Muoio said. “As the Fed signals a series of rate hikes to come and key economic proposals stall in Washington, it appears the market may continue to stall until more clarity emerges.”