Monday Morning Scoop - CRE Price Growth Still High … For Now

CRE Price Growth Still High … For Now

The rate of increase has turned the corner and is on its way down. CRE prices are still rising, but the rate of growth for most types seems to have hit the top and has tipped over on the downward slope, according to data from MSCI’s Real Capital Analytics.

“Price growth for US commercial properties hovered just below recent record highs in May, supported by price gains in the industrial and apartment sectors,” the firm’s report said. “The RCA CPPI National All-Property Index climbed 18.6% from a year ago, slightly down from the record annual growth of 19.3% seen in January.”

This is not the first indicator that CRE price growth is slowing. 

The rates are uneven across property types, as Real Capital Analytics graphs show. Industrial prices were up year over year a record 28.6% in May 2022 and 1.8% over April. “Prices on traded properties have remained robust even amid signs of potential cooling in the market, as industrial deal volume retreated for a second consecutive month in May,” the report said.

Multifamily also was at an all-time high for the second month in a row, at 23.3% growth. “The index for retail properties increased 18.8% from a year ago,” explained Real Capital Analytics. “While still a significant double-digit growth rate, the pace has eased for three consecutive months.”

After that, growth was much slower. Office saw a 12.2% year-over-year lift, an average of property types pushed up by central business district office price growth of 13.4%. The latter was the fastest growth for CBD offices in eight years. Suburban offices, which were supposed to be a hotter commodity during the pandemic, were up 10.5%

That’s the good news for investors. However, a closer examination of the graphs suggests that price growth may be hitting a ceiling and turning a corner. That’s all back to calculus and the second derivative, which is the pace at which change is varying. Even while prices continue to rise, the pace is slacking off, though at current trends, it will take some extended time for industrial, apartments, office, and even retail to come closer back to pre-pandemic levels.

That’s assuming no significant change in current conditions, but that’s hardly a given. Yes, price growth could continue if cap rates keep compressing, and they might. But inflation and increasing financing costs might take a toll. Interest rate caps prices are so high that they’re already quashing many dollars in deals. Plus, cap rate compression can only continue if cash flow from rentals can rise fast enough for investors to accept higher costs. With inflation at 8.6% at last count, it’s unclear whether people and small businesses can continue to bear increased rents.

By Erik Sherman