IRVINE, CA—The industry cannot entirely avoid a cyclical downturn, but it can minimize its effects by maintaining solid underwriting standards and not letting valuations get too rich relative to underlying fundamentals, Ten-X's senior quantitative strategist Chris Muoio tells GlobeSt.com. As we recently reported, according to the firm's recent Nowcast—a monthly pricing index that combines Google Trends data, Ten-X's proprietary transaction data and investor surveys to forecast CRE pricing trends in real time—commercial valuations rose by 0.8% during September. The figure represents a slowing pace of pricing growth across the five commercial real estate sectors, driven largely by declines in the hotel and retail sectors. According to Ten-X Research, overall CRE valuations remain 6.7% higher than a year ago despite the contracting pricing for retail and hotel assets, following rapid growth in July and August. We spoke exclusively with Muoio about his overall view of the slowing price-growth trend and how the industry could mitigate a potential downturn.

GlobeSt.com: What is your overall view of the trend of slowing CRE pricing growth?

Muoio: Our view is that CRE pricing is rising moderately alongside the pace of the economy. The large valuation run-ups from low levels seen earlier in the cycle have passed, and we are now in a more stable, later-inning phase of growth in which valuations expand in conjunction with their fundamentals. This is especially true with the abatement of the added boost that contracting interest rates had provided to valuations in previous years.

GlobeSt.com: What does this trend indicate for the future of the industry?

Muoio: The moderating price expansion indicates that the industry should expect fundamentals to now track underlying NOI generation more closely, since the chase for yield and safe-haven assets is diminishing. Valuation gains will have to be driven more by cap-rate spread compression and rising NOI than by falling interest rates, which was a tide that lifted all boats.

GlobeSt.com: Can the CRE industry avoid or minimize a cyclical downturn?

Muoio: The CRE industry cannot entirely avoid a cyclical downturn, but it can minimize its effects by maintaining solid underwriting standards and not letting valuations get too rich relative to underlying fundamentals. The different CRE sectors have different levels of cyclical risk though, with hotel the most exposed to a turn in the cycle. Multifamily and its robust demographic underpinnings are the least vulnerable to shifts in the economy.

GlobeSt.com: What else should our readers take away from your most recent Nowcast?

Muoio: The most important takeaway on our end was the divergence in retail and hotel pricing from the other sectors. The retail sector has been struggling to generate improvements in vacancy and rents, as the continued ascent of e-retail has been a secular headwind. The hotel sector is grappling with its own technological threat in the form of Airbnb and other home-sharing services creating shadow supply in larger markets, in addition to an influx of traditional supply and a weak backdrop for international tourism. Occupancies have stalled in many larger markets, depressing RevPAR growth, and pricing is reflecting this reality. The retail and hotel sectors' pricing divergence from the other sectors signals that CRE valuations are no longer rising in concert due to a need for yield or falling interest rates; they are instead shifting into a phase where sector fundamentals are becoming bigger determinants in pricing. This was reflected in the survey data that feeds into the Nowcast.

GlobeSt.com: What is your overall view of the trend of slowing CRE pricing growth?

GlobeSt.com: What does this trend indicate for the future of the industry?

GlobeSt.com: Can the CRE industry avoid or minimize a cyclical downturn?

GlobeSt.com: What else should our readers take away from your most recent Nowcast?

Instant Insights /

Can CRE Do Anything to Minimize a Downturn?

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