Investment-Grade CRE Assets Hit Biggest YoY Price Decline Since March 2010

October was another bad months for CRE sales. November’s CoStar Value-Weighted U.S. Composite Index — big property sales in large metro areas — with data through October, was down 1.4% over September. The number was also down 8.7% year over year.

“Meanwhile, the Equal-Weighted U.S. Composite Index, which shows the more numerous, lower-priced property deals more common in smaller markets, posted its largest monthly decline since the Federal Reserve began increasing its policy rate in March 2022. The index slid 1.4% in October and was almost flat compared to October 2022, rising 0.2% over the prior 12 months.

The figures look at repeat sales of previously sold properties. That gives an arguably more accurate view of what is happening in property markets. The study involved 1,168 sale pairs in October and more than 298,112 repeat sales since 1996.

“The swing back to price declines in October was anticipated, according to Chad Littell, national director of U.S. capital markets analytics for CoStar, and author of the CCRSI report,” it said.

“The U.S. 10-year Treasury yield stagnated near 3.8% in July and August of 2023 before climbing to 4.9% in October,” Littell said in prepared remarks. “That negatively impacted asset pricing for sale closings starting off the fourth quarter. The pronounced drop in pricing this month reflected the higher borrowing costs seen in July and August.”

Since October, though, the yields on the 10-year have come down sharply. As of close of Friday, December 1, it was 4.22%. It’s unclear how long it might stay or even drop lower. A bit part of the move ion the 10-year is the presumption among investors that the Federal Reserve will start cutting interest rates. Pershing Square Capital Management CEO Bill Ackman had predicted that the Fed could start reducing interest rates in the first quarter of 2024, although based on the central bank’s ongoing remarks, that seems highly unlikely. Should the Fed hold its ground, the retreat in 10-year yields could again turn around.

Perhaps more disturbing for investors the fall in investment-grade property transactions, which had their largest year-over-year decline since March 2010. They were down 60.3% year over year. “The segment accounted for about 59.9% of the annual transaction volume during the 12 months ended in October,” CoStar wrote. “However, the general commercial sub-index, influenced by smaller, lower-priced assets, saw a less pronounced decline, falling 0.9% in October 2023. Despite the monthly step lower, this sub-index gained 3.1% during the 12-month period that ended in October 2023.”