Price Increases Could Signify the Start of a Bottom

Questions compile about where the economy is going. The Federal Reserve doesn’t know when rate cuts might happen. So, why should commercial real estate be able to predict where markets are going/?

Uncertainty, though, is a positive sign in CRE because some data at least shows the possibility of an eventual recovery and not only a predictable downward trudge. An example: A Goldman Sachs analyst thinks office transaction volumes might have bottomed.

A new sign is a report from CoStar that looks at the company’s repeat-sales indices through May 2024. Transaction volume was up for the third consecutive month, reaching $8.4 billion in May, up 0.6% from April. That broke out to general commercial rising between the two months 4.3% to $3.6 billion and investment grade falling 2.1% to $4.8 billion.

In the 12 months ending May 2024, the market shed 29 million square feet of space. At the same time, deliveries over the period added 815.6 million square feet. That’s down 10.9% from the same period in 2023. “Only 85.5 million SF of general commercial properties are projected to be delivered in the 12 months ending in June 2024, a drop of 25.7% over the prior 12-month period,” they wrote.

CoStar measures price movements through two different indices. The value-weighted U.S. Composite Index, more heavily influenced by high-value trades common in core markets, increased for the first time in nine months to 243, a step of 1.3% higher over the prior month, it wrote. “Compared to the 12 months ending in May 2023, the index was 8.7% lower and was off by 19.6% from the July 2022 all-time high.”

The equal-weighted U.S. composite index reflects the more numerous but lower-priced property sales typical of secondary and tertiary markets. This stepped 0.2% higher to 316 in May 2024, they said. “The index increased by 1.6% in the 12 months ending in May 2024 and was 0.4% below the September 2023 all-time high.”

“The uptick in value-weighted values could be the beginning of a bottoming process or simply a brief pause in the otherwise steady decline in values, similar to the price action in the summer months of June through August 2023, where pricing moved slightly higher before resuming its multi-quarter trend lower,” they added.

Distressed property sales decreased as a share of all transactions, with only 2.2% of repeat sales in May “classified as experiencing financial problems, such as being acquired through foreclosure or court-appointed sales, compared to double that rate in April.” That was down by nearly half from April’s volume, considered a positive outcome because investors found other properties to consider. For perspective, in 2010 and 2011 after the Global Financial Crisis, there were months when distressed sales were as high as 35% of total transactions.