Commercial Real Estate Price Growth Wanes

Michael Tucker mtucker@mba.org

September 12, 2018


U.S. commercial property price growth lost steam for the fourth consecutive month in July, reported Real Capital Analytics, New York.

The RCA National All-Property Index rose 7.0 percent year-over-year in July, nearly half the pace of price growth shown in early 2015. CRE asset prices rose 0.7 percent between June and July.

RCA Manager of Analytics Elizabeth Szep noted price gains continue to diverge across property types. Apartments posted the highest monthly and annual increases in July with prices growing 12 percent year-over-year, driven by growth in secondary and tertiary markets. Central business district office prices gained just 1.3 percent from a year ago, the weakest price increase among the property types, while retail prices grew 1.8 percent, she said.

Peter Rothemund, Senior Analyst with Green Street Advisors, Newport Beach, Calif., called CRE price growth "lethargic" overall, but agreed some sectors continue to see outsize growth. "Property appreciation for most types of real estate, particularly the big sectors investors are focused on, has been pretty anemic over the past couple of years," he said. "But there are quite a few outliers to that trend. Industrial values are up 20 percent over the past two years. Pricing in many of the niche sectors--manufactured home communities, medical office, life science and student housing--has been rising rapidly as well."

Rothemund said the Green Street Commercial Property Price Index increased by less than half a percent in August.

Ten-X, Irvine, Calif. showed similar results, reporting U.S. CRE prices continue to make "steady, incremental" gains. "Following last year's price weakness, 2018 is turning out better so far as buyers and sellers have adjusted their expectations, Ten-X Chief Economist Peter Muoio said. "We have shifted from a strong bull run followed by a correction to a more moderate upward price trajectory."

CoStar, Washington, D.C., said the sale-price-to-asking-price ratio narrowed by nearly 50 basis points in July to 92.2 percent. This measure of the spread between buyer expectations and seller expectations has remained in the 92 percent range for the past 12 months. Meanwhile, the share of properties withdrawn from the market by discouraged sellers receded by nearly a full percentage point to 27.8 percent during the 12-month period that ended in July, CoStar said.

Overall, commercial real estate fundamentals remained in solid shape throughout the second quarter "with cyclically low vacancies and sustained rent growth supporting price gains across most property types and regions," CoStar said. The firm's Composite Price Indices report noted transaction volume totaled $137.5 billion in the 12-month period that ended in July, 3.8 percent higher than in the 12-month period ending in July 2017.

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