IRVINE, CA—Commercial property pricing retreated by 0.3% in June, although two of the five major sectors enjoyed gains during the month, Ten-X said Thursday. This marks the second consecutive monthly decline in Ten-X's Commercial Real Estate Nowcast, due to rising interest rates, policy uncertainty and mounting questions about the long-term viability of the current economic cycle.
“While commercial real estate pricing appeared to be rebounding earlier this year, recent declines show a market struggling to cope with various economic uncertainties,” says Peter Muoio, chief economist at Ten-X. The firm reports that pricing remains 9.5% above the year-ago period, though.
Multifamily and retail both posted pricing gains of 0.9% during June; however, that's where the similarities between the two sectors end. Apartments continue to inspire investor confidence over the long term thanks to still-low vacancy rates, although the pipeline of product due to come on line by year's end may push those rates up.
In terms of the apartment sector, June's strongest performer among regions of the country was the Midwest, which has the strongest fundamentals and the smallest amount of new construction. For all other areas, middling declines or declines were the story during June.
Conversely, retail's month-over-month pricing increase followed a 1.2% drop during May. The threat of e-commerce, recently underscored by Amazon's purchase of Whole Foods Market, continues to hang over the sector. The Ten-X Retail Nowcast is now up just 6.6% year over year, the second weakest showing among all property segments
While most of the overall decline in June was concentrated in the office and hotel sectors, the property types also differ in their underlying stories. Lodging's 3% monthly decline continues a pattern of weakness dating back to late 2015, aggravated by a decline in international travel, competition from upstarts such as Airbnb and oversupply in many key markets. A shallower decline was experienced by the Southwest, where pricing edged downward by just 0.1%, in contrast to the region's office sector performance during the month.
The Ten-X Office Nowcast declined by a more moderate 0.4%, continuing a two-steps-forward/one-step-back growth pattern from month to month. The biggest contributor to the decline was a 4.7% drop in the Southwest, with Houston and other energy industry centers suffering from low oil prices. Ten-X describes the office sector's current state as “tepid,” despite a 19.3% Y-O-Y gain in pricing.
Industrial pricing has remained essentially flat over the past several months, surprising in view of the healthy demand from e-commerce retailers—and from brick-and-mortar stores beefing up their online presence. That being said, Ten-X says a rise in cloud computing and the expansion of the cannabis industry into new states should continue to fuel demand.
Although not all sectors saw pricing declines in June, “the month served as a testament to the current vulnerability of the overall CRE market,” says Muoio. “While apartment and retail both posted solid gains, each sector is facing headwinds that could threaten their growth in the future. As unpredictability in Washington, DC and around the globe continues to give investors pause, the persistent slump is now threatening to affect sectors that previously appeared unassailable.”
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
