CRE Property Prices Down 4.9% From Recent Highs

It’s hard to remember that basic truth of Newtonian physics that what goes up, unless snagged by a high-flying eagle, eventually returns under force of gravity. On the whole, that’s what happened to commercial real estate property prices according to the Green Street Commercial Property Price Index in the second quarter of 2022.

The index—a “time series of unleveraged U.S. commercial property values that captures the prices at which commercial real estate transactions are currently being negotiated and contracted”—dropped by 3.7% between May and June. The total drop from a high in March has been 4.9%.

That’s still an overall increase of 10% over the last 12 months is 10%, up 9% since pre-covid times. 

“The repricing that has occurred in bonds and stocks is finally evident in the commercial property market,” Peter Rothemund, co-head of strategic research at Green Street, said in prepared remarks. “Price discovery is still taking place, and economic uncertainty and interest rate volatility make that challenging, but prices of most properties are down 5%+ from recent highs. In a few sectors, pricing has held up better.”

Performance varies significantly by property type. The two worst performing between May and June were strip retail (down 7%), net lease (also down 7%). Strip retail had been up 7% since pre-pandemic and 15% in the last 12 months as economies were reopening. Net lease has seen 6% growth pre-Covid and 5% 12-month growth. 

Interestingly, industrial, a sector that’s been particularly hot since the pandemic at 42% growth and up 15% over the last 12 months, was the third biggest drop, down 6% from May to June.

Manufactured home parks, with overall stresses on rental housing available and pricing, have done well overall, with a 17% increase over 12 months, up 33% pre-Covid, and no loss between May and June.

Self-storage has been another segment that has done well given economic and social strains: up 58% since pre-Covid, 28% 12-month growth, and a lower-than-average loss of 4% over the last tracked month.

Office had only a 4% drop in the most recent month but was down 1% over the last 12 months and -9% since before the pandemic. So, a negative net overall.

Multifamily has been up 15% over 12 months, 16% since before the pandemic, but a 4% drop during the last month.

There have been multiple signs that price growth was turning a corner downward, and after the rapid increase in so many categories over the last two years, there was the logical question of how much higher they, and the rents paid by consumers and companies, could go.

Prices have begun falling in housing, although low inventory has kept the slide from becoming a rout and SFR investor purchases are up. CoStar has expected multifamily demand to cool over the next six months.