A Closer Look at Property Prices' Downward Trajectory

Green Street’s latest commercial property outlook, by Co-Head of Strategic Research Peter Rothemund and Analyst Alex Boyle, noted that property prices are now down by 15% from their heights in March 2022. Also, that further declines aren’t over.

The one warm note is cold storage, and it’s probably more accurate to call that lukewarm as it has been flat since March 2022. From there on, everything is down. For some property types it’s a slight dip: gaming (-2%), lodging (-3%), tower (-7%), single-family rental (-9%), and industrial (-10%). The biggest five losers are ground lease (-29%), office (-27%), apartment (-21%), mall (-18%), and net lease (-16%). In the middle are self-storage (-14%), healthcare (-13%), data center (-13%), manufactured home (-12%), and life science (-11%).

Something to remember is that these changes are off unusually high values, so whether to be seen as a pure loss or a return to more historically realistic levels isn’t clear.

The question next becomes where prices might go. First, as the authors say, it’s necessary to determine aggregate long-term returns by way of a discounted cash flow (DCF). With current overall cap rates of 5.6% and net operating income (NOI) growth projections of 4.3% near to mid term and 2.1% long-term, real estate should achieve a 7.1% unlevered return, according to the authors’ analysis. They write that CRE prices would have to fall another 10% to achieve long-time norms of spreads compared to Baa-rated corporate bonds. So, further distance to go for values.

The DCF they used in aggregate varies depending on the property type. At the bottom are office (6.1%), lodging (6.5%), life science (6.6%), apartment (6.8%), and single-family rental (6.9%).

Ascending from there are self-storage (7%); strip center (7.1%); data center (7.2%); tower, cold storage, and healthcare (around 7.3% each); net-lease and mall (7.4% each); industrial (7.5%); gaming (7.6%); manufactured homes (7.8%); and ground lease (8.4%). These are all risk-adjusted DCFs before asset management fees.

Then the authors combined this analysis with looking at equity market views of REITs and the premium or discount they trade at compared to private-market values. “In aggregate, REIT investors discount private-market real estate prices by 11%—roughly the amount that a comparison of expected returns [versus] Baa corporate bond yields suggests is warranted.”

The conclusion: even at a 15% aggregate discount to March 2022 prices, CRE property prices are too expensive and likely to further fall in value. The best relative values are ground lease, manufacturing housing, gaming, net lease, and industrial. The worst: office and life science.