Commercial real estate pricing rose 0.5 percent in March, according to Irvine, California–based Ten-X Commercial’s CRE Nowcast for the month. The 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, revealed the index’s second consecutive monthly gain.
Despite the March pricing uptick, however, the Ten-X CRE Nowcast now stands a meager 0.7 percent higher than a year ago, just 30 bps above its historic low. “After nine consecutive months of contraction, the pricing gains in February and March indicate that investor sentiment has begun to bounce back,” says the firm’s chief economist Peter Muoio. “While it is too soon to say how long this upward trajectory will last, it is encouraging that the market responded positively, even as the Federal Reserve confirmed another rate hike and equity markets roil with uncertainty.”
Gains in four of the five property segments, including in hotel, office, apartment, and retail, were enough to outweigh a 0.5 percent decline in the industrial segment. Consider the following data on these individual sectors.
The Ten-X Hotel Nowcast bounced back from two straight months of decline, climbing 1.6 percent in March, the strongest increase of any property segment. While hotel pricing had slipped below its year-ago figures in February, the strong performance was enough to push the index to 0.5 percent higher than a year ago. Survey data is generally positive on the segment, with strong recent readings in domestic travel demand, occupancy rates and room rate growth. All regions saw pricing increases in March, except for the Southwest, which saw its tenth consecutive month of decline.
The Ten-X Office Nowcast continued its saw-tooth pattern, climbing 0.8 percent in March after a 0.3 percent decline in February. The segment’s year-over-year gains now stand at 1.3 percent and have only moved minimally since early 2017. The national stagnancy is reflective of two uninspiring regional market types: those that recovered strongly in this economic cycle and are now facing increased supply, and those that lack significant demand drivers entirely. While there is little indication that the office segment will break out of its fundamental funk this year, every regional submarket saw a pricing increase in March.
Pricing in the apartment sector edged up 0.2 percent in March, according to the Ten-X Apartment Nowcast, making it the second monthly increase after seven consecutive months of contraction. On the year, pricing fell 0.7 percent, representing the first year-over-year decline for the apartment segment since the Nowcast’s inception. Apartment pricing grew in the Midwest and West regions in March, but contracted in the Northeast, Southeast, and Southwest. While the segment has had trouble digesting its new supply, completions should begin to ease in the next few years, and low single-family inventories should also transform some consumers from renters to buyers.
The Ten-X Retail Nowcast edged up also, increasing 0.2 percent in March despite the sector’s oft-repeated challenge of consumers’ move to online shopping. The index is now an impressive 6.5 percent above year-ago levels, an annual gain that far outpaces that of any other segment. The modest gain on the national level masked significant divergence between strong gains in the Northeast and a sharp decline in the Southwest, with the other three regions posting more modest changes.
Interestingly, the Ten-X Industrial Nowcast reversed its impressive February gain and posted a 0.5 percent decline in March. The segment’s year-over-year pricing decline deepened to 3.8 percent – the sixth consecutive month in which the Industrial Nowcast has failed to post an annual gain. The sector’s pricing declines come despite the e-retail tailwind that has driven major gains in both vacancies and rent conditions. However, while investor sentiment and Google search trends were mixed, transaction data was decidedly negative. The weak investor sentiment may be due in part, to trade-related uncertainty, since the threat of tariffs could have an adverse impact on various uses for industrial property.
“A second consecutive month of pricing gains is a positive sign for the market, but we’re clearly looking at a commercial real estate environment that has lost significant steam from earlier in the cycle,” says Muoio. “Even as four of the five property sectors rose this month, office and industrial are behind their March 2017 figures, while hotel’s annual increase is fairly minimal. Even in the retail and office sectors, in which pricing has increased significantly in the past year, there still exists a sizable amount of risk.”