CRE Price Growth Slows in March; Deal Volume Slips

Annual growth in U.S. commercial real estate property prices slowed in March to the most modest rate since 2011, reported Real Capital Analytics, New York.

“The waning of annual price growth comes as the pace of commercial real estate dealmaking also slows,” said RCA Senior Analyst Wyatt Avery. He noted U.S. investment volume was down 11 percent in the first quarter compared to a year earlier.

RCA’s National All-Property Index rose 5.8 percent from one year ago and 0.4 percent from February, Avery said. Even apartments, though long favored by investors, saw slowing price growth and posted only a 0.4 percent increase in March. Apartment property prices grew 7.3 percent year-over-year–second only to the industrial sector–but apartment prices had been gaining close to 13 percent a year ago.

RCA reported industrial prices grew 8 percent from a year ago. “Strong demand pushed acquisitions of individual industrial properties to a record level for any first-quarter period in early 2019,” Avery said.

Office sector prices rose 0.5 percent from February and 5.2 percent from a year ago. Suburban office price gains have slowed over the past year but central business district office price growth has picked up speed, RCA said.

Retail prices posted a 1.9 percent year-over-year gain in March, the slowest growth among various property types.

RCA Senior Vice President Jim Costello said U.S. commercial property deal volume fell at double-digit annual rates in the first quarter as a “bumpy” interest rate environment led to greater investor caution. “The size of deals in the pipeline suggest an improvement later this year, however,” he said.

Costello noted the rate environment has been on a “roller coaster” since late 2018, which led to lower-than-expected deal activity in the fourth quarter and in early 2019.

“Into the first quarter of this year, commercial mortgage rates moderated and by March these rates were back to the levels seen in September,” Costello said. “While rates are lower though, deal activity cannot immediately go back to the same pace of growth seen in previous months.”

Green Street Advisors, Newport Beach, Calif., reported the price of unleveraged commercial properties owned by real estate investment trusts increased just 0.1 percent in March. The index has shown stability recently, increasing less than 1 percent over the past six months.

“Late last year, when interest rates were rising and equities were falling, a lot of people were wondering whether property pricing was finally about to turn,” said Green Street Advisors Managing Director Peter Rothemund. “But now that the 10-year Treasury is back to the mid-twos and the S&P is closing in on its old highs, you don’t hear much of that chatter anymore.”

Rothemund predicted property values will likely end 2019 “about where they started the year.”