Early Price Discovery Says Property Types Split in Performance

The overall CRE market performance continued to head down in March 2023 according to the latest CoStar Commercial Repeat Sale Indices (CCRSI). But the overall move masks the individual differences that might be important to investors, owners, and developers at the moment.

CoStar tracks properties through transactions, particularly repeat sales because a group of deals involving the same building create a moving image of changing prices in an apple-to-apple comparison. Collect as many of these as you can, and the theory is that it’s possible to build a more realistic view of market activity than a looking at one-time sales of different properties.

Results are then indexed for comparisons. How things look still depend on how you consider them.

“The value-weighted U.S. Composite Index, more heavily influenced by high-value trades common in core markets, fell for the eighth consecutive month to 277, a decline of 1.3% over the prior month,” CoStar wrote. “The index also slumped 5.2% during the 12 months ending in March 2023.”

On the other hand, the equal-weighted U.S. Composite Index, which includes secondary and tertiary markets where sale prices are lower but volumes larger, was up four points in March, a 1.3% gain rather than decline. Seven of the last eight months were declines. It gained 4.8% in the 12 months ending in March.

Both indices though have been slowing for about nine months.

Then there is the investment grade, influenced by higher-value properties, and general commercial grade, influenced by lower-value properties. The investment grade index was down 1.4% in March and has been down in seven of the last nine months. The commercial grade index was up 1.3% in March, the second positive movement in the last five months.

Similar to the value-weighted and equal-weighted, smaller properties did better in the long run. Investment grade was down 3.4% over the 12 months while the commercial grade was up 6.2%. There is no explanation or speculation on why smaller properties have been doing better. Perhaps it’s a result of rising interest rates and price differentials. When financing is more expensive, a less costly property might make a project viable.

When looking by at property types that CoStar considers major—office, multifamily, industrial, and retail, but excluding land and hospitality—results varied.

Higher interest rates had the biggest impact on multifamily, according to CoStar, with the March index falling 2.4% in the first quarter of the year and 2.2% in the previous 12 months. Multifamily “showed the sharpest annual decline in values since the interest rate hiking cycle  began in the first quarter of 2022.” Office prices also fell, by 2.4% in the first quarter and down 5% over the previous three quarters with prices sagging 1.4%.

Retail was up a negligible 0.2% in the quarter and 3.3% over 12 months. Prime industrial was the clear leader, being up 2.5% in the quarter and 10.8% over 12 months. And the equal-weighted industrial index declined 0.1% in the quarter.