Commercial real estate prices are officially cooling off
The overall price of multifamily and commercial properties valued above $2.5 million fell by 0.8 percent in January following a flat month of price growth in December, according to Moody’s/Real Capital Analytics (RCA).
“It is the first monthly decline in the index in six years,” said RCA’s Senior Vice President Jim Costello during a telephone interview. “It is not entirely surprising given that trends were flat in December.”
Analysts have been predicting a slowdown in commercial prices, which had been growing by double digits and reached a new peak this past year.
Over the past 12 months through January, the Moody’s/RCA Commercial Property Price Index has risen by 9.7 percent, but remained essentially flat over the last three months, rising just 0.3 percent.
There has been an even more dramatic slowdown in the nations’ top six commercial real estate (CRE) markets. For the 12 months, CRE prices rose by 13 percent in the major metros, but by just 0.1 percent over the past three months through January. Prices in these markets fell by 0.6 percent in January.
Costello said transaction volume remains high, however.
“In December and January, we had the strongest 60-day period of deal volume ever,” Costello said. “Even though you had this adjustment on the pricing side, people still came to the market and still did deals.”
Costello said that commercial banks and life insurance companies are still making financing available, although some lenders have pulled back. He said the commercial-mortgage backed securities (CMBS) market has been unsettled, however.
“In about September of last year, the spreads on CMBS shot up pretty quickly in response to turbulence in the corporate bond market, and it hasn’t come back down,” Costello said. “Normally, in the past, we have seen some disturbances and the rates come back down. This time, it stayed elevated. Suddenly, the cost of debt for commercial property investments has shifted upwards, and people have had to adjust what they are willing and able to pay for debt, and that is really a big part of the change in prices.”
The pause in the growth of CRE prices is healthy, said Ken Riggs, president of Situs RERC. Riggs said sales will probably also slow down because fewer properties will be available, and buyers are becoming more selective. Riggs also said a price correction could be more severe if interest rates rise significantly, a scenario that he does not believe is likely, however.
“The ability to raise capital is going to be more challenging than it was in the last year,” Riggs said. “It doesn’t mean it is terrible, but refinancing has become more selective as well. So naturally we should see a slowdown in the number of transactions, but for the right properties, you still will see properties come into the marketplace and buyers buying those properties.”