Pricing Drops Were Not That Drastic After All Last Year
While all property values were down last year by 8%, this was not the drastic ending that many feared, according to Peter Rothemund, managing director at Green Street.
Predictably, commercial real estate prices decreased last year, although the price changes were not uniform across property types. Industrial and manufactured home park values increased about 10% in 2020, while pricing of hardest-hit sectors fell 15 to 25%, according to Green Street. And, the Green Street Commercial Property Price Index was unchanged in December.
While all property values were down last year by 8%, this was not the drastic ending that many feared, according to Peter Rothemund, managing director at Green Street. This was due to many factors, some expected and some not-so-predicted.
“Property pricing ended the year down almost 10% on average, but that’s a better outcome than many expected earlier in the year,” said Rothemund. “A quicker-than-expected return of economic activity and remarkable success on the vaccine front played important roles, but the largest support for pricing has come from even lower interest rates. With rates so low across the board, Treasuries, investment grade, high yield, it is easy to see real estate prices increase from here.”
For some perspective, commercial property prices began to inch up in November. The Green Street Commercial Property Price Index increased by 1.8% but that was 8.2% below November 2019 levels.
Green Street said November price increases were widespread, with only the more challenged sectors not participating.
Apartments and industrial increased by 2% in November 2020. Apartments were down 5% from before COVID-19, while industrial has risen 8%.
The most significant increases in November came in student housing, which was up 6%, followed by manufactured homes and self-storage, up 5%. Since COVID began, self-storage has registered no change, while student housing was down 6% and manufactured housing prices have increased by 8%. Net lease pricing decreased by 8% as compared to pre-COVID pricing.
As a result, Rothemund pointed to firmer property pricing in the waning months of 2020.
“In several sectors, it’s above or close to pre-COVID levels and only the harder-hit property types remain down 10% or more,” he said late last year. “Cap rates that are on average in the 5% range look very attractive when BBB-rated corporate bonds yield around 2% or perhaps 3% if one really stretches on term.”
Other experts say credits must be good and the real estate must be well located. For companies that don’t have a sustainable path forward or are located in tertiary markets, there is still a divide.