Peter Muoio, chief economist, Ten-X Commercial | Courtesy Ten-X Commercial

CRE Prices Rise Again, But Lag Year-Over-Year

Carrie Rossenfeld Finance & Capital Markets

Commercial real estate pricing rose 0.2 percent in May, according to Irvine, California–based Ten-X Commercial’s newly released May Commercial Real Estate (CRE) Nowcast. The increase represents the index’s fourth consecutive monthly gain.

The CRE Nowcast is a monthly pricing index, which combines Google Trends data, Ten-X Commercial’s proprietary transaction data, and investor surveys to indicate CRE pricing trends in real time.

Despite the slight uptick, the Ten-X CRE Nowcast posted a 1 percent decline compared to May 2017 —the second consecutive month in which the index has seen a year-over-year drop. Previous to this April and May, the index posted continuous year-over-year growth since its inception in January 2011.

“Pricing declines during the second half of 2017 were partially due to rising interest rates and as rate increases have slowed in recent months, the Nowcast has begun to edge up again,” says Peter Muoio, Ten-X’s chief economist. “However, even with four consecutive monthly increases, the fact that pricing stands lower than a year ago is strong indication that investor sentiment is soft and undecided.”

May’s month-over-month pricing gains were broad-based, with office, apartment, retail, and industrial pricing all rising compared to April. Only the hotel segment experienced a decline.

The Ten-X Apartment Nowcast posted the biggest increase, rising 0.8 percent in May. Robust growth in the Southwest buoyed the sector, though all other regions except the West also saw pricing increases. However, the sector’s pricing is still 2.3 percent lower than a year ago, as the market has not been able to rebound from weakness that prevailed in the second half of 2017. Situs survey data shows investors are less optimistic regarding future valuations prospects, and bidding activity on the Ten-X platform correspondingly came in softer than expected.

The Ten-X Office Nowcast posted its third consecutive monthly gain, rising 0.2 percent in May to bring the year-over-year increase to 0.7 percent. Gains were concentrated in the Northeast, with other regions posting moderate changes. Investors appear to be positively appraising the sector’s value versus its current pricing, per Situs survey data.

The Ten-X Retail Nowcast remains the most consistent of all sectors; its 0.2 percent gain in May marked the 11th increase in the past 12 months. The index is now 4.8 percent higher than a year ago. Even as headlines about the struggles of brick-and-mortar dominate the media, consumer spending, incomes, and sentiment are high. Bullish bidding on the Ten-X platform bears out the sector’s strength. Regionally, the Northeast and Midwest showed the strongest performance, with 1 percent and 0.8 percent monthly increases, respectively.

The Ten-X Industrial Nowcast increased for the second time in seven months, although only climbing a meager 0.2 percent in May. The gain was overwhelmingly fueled by a 1.7 percent jump in the Midwest, which was enough to offset stasis or declines in the rest of the country. Both prevailing sentiment and recent fundamentals in the sector are strong, yet the pricing climate shows weakness. Year-over-year, the sector’s Nowcast is down 4.2 percent, the worst annual performance among all five sectors. Investor sentiment was soft again, per the Situs/RERC survey, and industrial bidding activity on the Ten-X platform showed similar weakness.

The Ten-X Hotel Nowcast was the only sector to post a month-over-month decline in May, dropping 0.5 percent compared to April. The sector’s pricing has now declined 4 percent since May 2017. While hotel operating conditions remain at peak levels, concerns continue to mount as RevPAR growth decelerates and new room supply picks up. Hotel pricing declines were broad-based, with all regions falling. Of note, travel-related Google keyword search data was weaker despite peak-level consumer spending on hotels, with ongoing volcano eruptions in Hawaii seen as a possible cause.

“While many of the trends we’re observing are easily explained, the malaise of industrial pricing remains a bit of a mystery,” Muoio says. “With some vestiges of trade-related uncertainty remaining, every region but the Midwest saw declines, and the sector’s pricing has dropped by more than 4 percent in the past year. Whether they feel that the market simply got ahead of itself earlier in the cycle, or whether they are anticipating a full-fledged contraction, it is clear that buyers in and beyond the industrial sector continue to exercise a significant amount of caution in their CRE investment activity.”