Ten-X Commercial’s chief economist Peter Muoio | Courtesy Ten-X Commercial

CRE Pricing Has Five Months of Growth But Y-O-Y Decline

Carrie Rossenfeld Finance & Capital Markets

Commercial real estate pricing rose 0.3 percent in June, according to the Irvine, California–based Ten-X Commercial’s June CRE Nowcast, representing the index’s fifth consecutive monthly gain. The monthly pricing index combines Google Trends data, Ten-X Commercial’s proprietary transaction data, and investor surveys to indicate CRE pricing trends in real time.

However, compared to June 2017, the Ten-X CRE Nowcast posted a modest 0.2 percent decline. June also marked the third consecutive month in which the index has seen a year-over-year drop. Before April, the index had posted continuous year-over-year growth since its inception in January 2011.

“The positive pricing direction can be attributed, in part, to the fact that upward pressure on interest rates abated in June as U.S. 10-Year Treasury yields dropped below 3 percent,” says Peter Muoio, Ten-X’s chief economist. “With a range of macroeconomic factors pointing upwards, it’s not surprising to see positive pricing momentum.”

June’s month-over-month pricing gains were buoyed by the office segment, which saw its pricing climb a substantial 1.2 percent, Ten-X reports. Remaining segments posted negligible pricing fluctuations, with retail and hotel increasing in muted fashion and apartment and industrial posting declines.

The Ten-X Office Nowcast’s increase was the segment’s largest monthly pricing gain since late 2016, bringing the index a solid 2.4 percent higher than a year ago. Investors are positively appraising the sector’s value versus current pricing, according to the Situs survey data. Data from Live Bid events on the Ten-X platform was more mixed in June after appearing to be largely negative last month. Pricing gains were spread across all regions but were most pronounced in the Northeast.

The Ten-X Hotel Nowcast bounced back from two straight monthly declines, with a 0.4 percent monthly pricing increase in June. The Nowcast remains 0.5 percent lower than a year ago, however, and the index has declined in a majority of months dating back to late 2017. With hotel fundamentals highly correlated to U.S. economic conditions, the market will likely thrive as long as the labor market and GDP continue to grow, according to Ten-X. Hotel pricing increased in all regions except the Northeast, and investor sentiment via the Situs/RERC survey was largely positive this month.

The Ten-X Retail Nowcast continues its consistent run of growth and its 0.1 percent pricing gain in June marked the 12th increase in the past 13 months. The Nowcast is now up a solid 3.9 percent from a year ago. Although investor sentiment was largely negative in June, per the Situs survey, Ten-X platform trends were predominantly bullish. Pricing trend trajectories differed sharply along regional lines. Pricing in the Northeast and Midwest increased 1.8 percent and 1.1 percent, respectively, while the Southwest saw a 1.1 percent decline, the firm reports.

Two sectors that had been especially strong during this real estate cycle — apartments and industrial — saw pricing declines in June. The Ten-X Apartment Nowcast found that pricing fell 0.3 percent in June, bringing the index 2.1 percent lower than a year ago. Vacancies are climbing across a majority of key markets as supply additions become available late in the cycle. Google search trends and Situs survey data both show that investor sentiment is negative toward the apartment sector, though Ten-X platform activity remains mixed. Pricing only increased in the Midwest, while the other four regions posted declines.

Also, the Ten-X Industrial Nowcast noted that pricing fell 0.1 percent in June and has now declined in three of the past four months. Both prevailing sentiment and recent fundamentals in the sector are strong, yet the pricing climate shows weakness. The sector’s Nowcast is down 4.6 percent year-over-year, the worst annual performance among all five sectors. Per the Situs/RERC survey, investor sentiment was soft again and Ten-X platform trends show similar weakness in bidding activity. Trade-related uncertainty has mounted significantly in the past few weeks, including multiple rounds of back-and-forth tariffs with China. Industrial sector pricing increased modestly in the Midwest and West but declined in the three other regions, including a heavy loss in the Southwest.

“Many investors continue to wonder if the cycle is near its peak and whether interest rates at this level or higher, will impact pricing negatively,” Muoio says. “While the risk of a trade war still looms, overall pricing has trended upward in each month since February. As each segment has its own legitimate risks — including trade, supply and e-commerce — it’s encouraging to see the Ten-X Commercial Nowcast’s continued uptick, demonstrating that investor sentiment in real estate remains quite strong.”