CRE Property Values Rise, But Absorption, Volume Slow
Commercial real estate assets prices rose slightly in February. But analysts said moderating space absorption and slowing transaction volume indicate the commercial real estate cycle is maturing.
Real Capital Analytics, New York, reported its national all-property index rose 0.5 percent in February and 8.1 percent from a year ago.
“Apartment and industrial price growth continues to top other property types,” RCA said. Apartment prices grew 0.7 percent month-over-month and 11.1 percent from a year prior while industrial asset prices grew 1.3 percent and 9.3 percent over the same periods.
RCA said suburban office price growth has accelerated, growing 0.4 percent month-over-month and 3.6 percent over 12 months. But central business district office prices continue to decline; prices fell 0.8 percent for the month and 1.7 percent for the three months prior.
The retail sector moved out of last place among property types with 0.4 percent price growth for the month and 3.0 percent growth from a year ago. “Investors continue to find some bright spots in the retail market, including grocery-anchored centers and urban storefronts,” RCA said.
Recent price gains in secondary and tertiary markets now eclipse those in the six largest metros–New York, Los Angeles, Chicago, Houston, Phoenix and Philadelphia, RCA said. Prices in non-major metros posted 0.7 percent growth for the month.
CoStar, Washington, D.C., reported stronger price growth at the market’s lower end. This trend–along with moderating space absorption and slowing transaction volume–reflect a “maturing” commercial real estate cycle, the data firm said.
CoStar’s equal-weighted commercial property price index, which reflects lower-priced property sales typically seen in secondary and tertiary markets, advanced by 1.4 percent in February and 13.2 percent over the last 12 months. By comparison, the firm’s value-weighted index, which tracks larger asset sales, fell 0.5 percent in the month and posted a 6.2 percent annual gain.
Drilling further into its equal-weighted index, CoStar said smaller properties with lower price points increased 14.8 percent over the last 12 months while higher-value investment-grade properties rose a more modest 6.8 percent in the same period.
Demonstrating the moderating overall demand for commercial real estate space, net absorption across the office, retail and industrial sectors is projected to decrease nearly 25 percent from the average pace of the prior three 12-month periods, CoStar said. “This slowdown in leasing activity is expected as the CRE cycle matures and has been most evident in the office sector, where slowing working-age population growth along with tight labor markets has begun to dampen the pace of absorption from recent levels.”
Transaction volume also continues to moderate, CoStar said. Composite pair volume fell 2.9 percent relative to a year ago to $130.2 billion. The slowdown was more noticeable among investment-grade properties, where transaction volume dropped 3.6 percent compared to just under 1 percent for non-investment-grade assets.
