CRE Prices Continue to Decline

But if prices are falling and transaction volume is measured in dollars, could it be that markets are in better shape than it has seemed?

There have been many analyses of CRE property sales, tallying the quarter-over-quarter and year-over-year drops. Property type by type, geographic differences. The creeping increases in loan delinquencies and defaults. Even valuations.

What makes this new Trepp analysis interesting is the focus on actual property prices, based on repeat sales methodology. It’s not unique; some other firms do it. But it’s an approach used not often enough. Comparing difference in sales prices on identical properties is a way to follow how market-determined values change, and not on a more arbitrary valuation from a bank but through what a property can command in open trading. “In total, we calculated 338,726 repeat sales since 2000 and have added 6,296 new sale pairs in Q3 2023” based on proprietary CRE transaction data, they wrote. Trepp then calculates its Trepp Property Price Index to show price movements over time.

There have been continuous declines since mid-year 2022. Since the end of 2022 Q3, the index declined by 5.8%. “The change in the direction of the CRE market can primarily be attributed to increasing interest rates and heightened inflation,” they wrote. “Despite the Fed holding its benchmark rate steady in recent quarters, the high interest rates keep pushing CRE prices further downward as the TPPI continued to slip in 2023 Q3, with prices falling at a similar rate to what was observed in the last few quarters.”

The overall downward trend varies by property type. Trepp calculated the percentage of properties by type — industrial, multifamily, retail, and office — by time. Below are the categories with the percentages of properties sold at a loss, first in 2022 Q3 and then 2023 Q3:

“The doom loop for office properties appears to be a nationwide phenomenon,” they wrote. “Among five of the largest states with the most office property transactions, namely California, Florida, New York, Illinois, and Arizona, there has been a consistently large uptick in the percentage of office properties sold at a loss in Q3. Collectively, these states accounted for 39% of all properties sold at a loss, which contributed to a sizable proportion of the decline in the TPPI in 2023 Q3.”

The property price drops over time do raise a question about transactions, though. Typically, when any analysis has reviewed sales volume, they have done a review of gross dollar sales. But if prices are dropping, some percentage of the lower gross transactions must be due to lower prices.

Unfortunately, to what degree this is taking place is difficult to say. Trepp uses its proprietary data and so do the other companies. It’s impossible to accurately compare all sets of numbers and determine how they fit together, or even necessarily to understand how much to discount dollar transaction volume in a given area to better know how many properties were sold.

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