CRE Pricing: Is the Glass Half Full or Not?

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WASHINGTON, DC—Two separate reports highlight a drop in commercial real estate property prices for the month of January. Beyond that basic fact, though, the tone of the two reports give one the impression they are each looking at entirely different landscapes. Washington, DC-based CoStar recently reported that its equal-weighted and value-weighted US Composite Indices within its Commercial Repeat Sale Indices slowed in the first month of 2016, compared to the “robust pace” of the last three months of the prior year. Specifically, within CoStar’s equal-weighted US Composite Index, both the Investment Grade and General Commercial Indices declined by 0.3%. In other words, price growth dropped at both the high and low end of the market during January. Now, this week, the New York-based Moody’s reported that the Moody’s/RCA Commercial Property Price Indices national all-property composite index declined 0.3% in January 2016. It is the first decline since the CPPI troughed in early 2010, Moody’s said and follows a flat performance this past December. Diverging Tones From there, the two reports diverge in their analysis of the decline. For example, Moody’s described the performance of the Moody’s/RCA CPPI as  “flat” this past December, compared to CoStar’s “robust pace” of the last three months. Moody’s/RCA CPPI’s overall index declined by 0.8% in core commercial prices over the past three months. But what is most striking is the tone of the reports, with CoStar’s far more upbeat. It, for example, pointed out that while monthly growth rates within price indices can be volatile, year-over-year growth rates remain strong. “January 2016 marked the 35th consecutive month of double-digit annual growth in the value-weighted US Composite Index and the 25th consecutive month of double-digit annual growth in the equal-weighted US Composite Index,” it said. In a prepared statement Moody’s Director of Commercial Real Estate Research, Tad Philipp said of the drop in January’s CPPI:  ”We consider this a significant milestone that signals that a shift in sentiment among commercial property investors is underway.” In January, office and industrial property prices each fell by more than 1%, according to Moody’s/ RCA CPPI. Retail was the only core commercial property sector to show a gain in January, with prices rising 1.1%, it said. The major markets are also showing signs of price deceleration, dropping 0.6% in January. In the past three months they have only risen by 0.1%. Apartments, as usual, continue to defy all expectations of how a maturing cycle should behave. Moody’s/RCA CPPI reports that apartment prices rose 0.7% in January and 2.7% over the past three months. CoStar’s Half-full Glass CoStar, for its part, rounded out its report with other metrics supporting the notion of solid pricing in the industry. The number of observed trades over the last 12 months ended in January 2016 increased by 5 percent over the prior 12-month period ended in January 2015, it said. Also, the number of distressed sales has declined by 36% over that same period. CoStar also reported that:

• The average time on market for for-sale properties dropped sharply by 19.7% in the 12-month period ended in January 2016.

• The sale price-to-asking price ratio narrowed by 3.1 percentage points in the 12-month period ended in January 2016 to 93.5% — the highest this ratio has been since July 2007.

• The share of properties withdrawn from the market by discouraged sellers receded by 4.7 percentage points to 33.1% during the 12-month period ended in January 2016.