Pricing Gains Continue Slowdown

Apartments’ strength masked weaknesses in other sectors during March, says Muoio.

IRVINE, CA—Commercial property valuations have increased over the past month, but just barely. The latest Ten-X Commercial Real Estate Nowcast, released Thursday, shows that commercial valuations increased by 0.2% in March, continuing a trend of deceleration in growth. This 19-basis point monthly increase in Ten-X’s all-segment nowcast for March capped a 7.6% rise from a year ago, the slowest annual increase since the end of 2014. “The March all-segment increase actually masks weakness across all property segments except for apartments,” says Peter Muoio, chief economist with Irvine, CA-based Ten-X (formerly Auction.com). “While our all-segment nowcast is down slightly from its end-of-year 2015 level, the apartment sector is enjoying strong pricing on the Ten-X platform as there has been positive traction from investors who like the direction apartment cap rates are heading.” Aside from multifamily, all other property segments were either flat or down in March from the previous month. Apartment valuations in March increased a solid 233 bps, signaling that sector’s strongest gain since May 2015. Apartment valuations were up 9.5% year over year, thereby putting the sector in solid positive territory for the first quarter. Conversely, values in the hotel and office segments continued to move in the opposite direction. Hotel valuations dropped 124 bps between February and March, in the fifth consecutive monthly decline. That leaves the sector up only 2.6% on a Y-O-Y basis, its weakest annual gain in the current cycle. Citing surveys of commercial real estate investors and lenders done in conjunction with Situs/RERC, Muoio observes that “CRE participants are decidedly downbeat” on the hotel segment. “With Airbnb becoming a bigger part of the hospitality landscape, the prospects for foreign travel decidedly weak and early-year fears of the economy derailing, we are not surprised that the survey participants have cooled on hotels.” Office valuations also dipped in March, declining 14 bps from February in the latest nowcast. They’re up just 2.2% from their year-ago level, also marking the sector’s weakest annual gain in this cycle. On the other hand, Muoio notes that office values posted steeper declines in January and February. “Indications that office rents are weakening some even in the hot New York office market had to have been noticed by survey participants, while many non-tech markets remain in their malaise and the Houston office market is being pressured by low oil,” he writes in a blog posting commenting on the nowcast. Meanwhile, the retail and industrial sectors remained flat in March. Retail valuations were up a solid 8.7% year over year, and were in positive territory for Q1, even as investors and lenders remain concerned by gains in the e-retail sector. Buoyed in part by the e-retail gains that threaten brick-and-mortar stores, industrial has increased 17.1% Y-O-Y. “Fundamentals in the segment continue to improve nicely and it is the standout among the property segments of benefitting from rather than being harmed by technology driven economic shifts,” according to Muoio.. That’s the case despite what Muoio sees as “mixed trends in data components” for industrial. “Google searches suggest weakness in pricing, but investors remain bullish on the segment according to the Situs/RERC survey.” In compiling its monthly nowcasts, the GlobeSt.com Thought Leade r combines Google Trends data, Ten-X’s proprietary transaction data and investor surveys to forecast CRE pricing trends in real time.