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Commercial property prices rise again

The upper end of the commercial real estate market continues to throw off mixed signals. Commercial asset prices — now generally far ahead of their peak during the last asset bubble a decade ago — rose solidly again in September, according to Real Capital Analytics (RCA), even as sales-transaction volume was down sharply for the fourth consecutive quarter.

crepricesRCA’s all-property index rose by 1 percent in the month and gained 7.5 percent year over year. This was the fourth consecutive month that the index — which charts the price of commercial properties valued at or above $2.5 million — rose by 1 percent or more.

Year-over-year, the price growth accelerated from a 7.3 percent annual gain in August.

Meanwhile, according to RCA, commercial property sales fell year over year for the fourth consecutive quarter during the third quarter. Total transaction volume came in at $114.2 billion in the July-through-September period, down 9 percent from the third quarter of 2016.

RCA analysts say that the top-line data on sales doesn’t tell a complete story of activity around the country or in each particular asset class. There are “pockets of growing sales” in some of the asset types, RCA noted. For example, sales in suburban office markets hit a record in the third quarter, but office properties in central business districts (CBD office) fell dramatically. Industrial property sales also exceeded the peak 2007 level in this past third quarter.

“The fact that there are pockets of growth suggests that the slowdown in sales is not a sign of an impending broader calamity,” RCA noted in a report. “Rather, there are unique features for each property type and deal structure influencing market trends.”

In recent months, analysts have cited a number of factors for the sustained price growth, despite the overall decline in sales. One is that buyers and sellers have been growing farther apart over pricing. In its most recent report, RCA noted that buyers are having a harder time getting “acquisition financing” to complete deals.

Investors do appear to be balking at the prices in some particular asset classes. CBD office prices are now 36 percent higher than the level 10 years ago. In the third quarter, CBD office sales fell 49 percent year over year, the biggest decline of any asset type.  

Price appears less of an issue with some other assets, however. RCA’s apartment index was 54 percent higher than its level a decade ago. Sales of apartment assets were up year over year by 5 percent in the third quarter. Apartment sales have fallen 9 percent through the first nine months of 2017, compared to the same period through 2016.

RCA’s all-property price index is 20 percent higher than it was 10 years ago. Year to date through September, the overall volume of sales is down 7 percent, compared to the same period in 2016, RCA said.

In its latest forecast released last week, the Mortgage Bankers Association (MBA) noted the “downshift” of certain growth trends, but predicted that the market would remain stable. MBA says commercial originations will end the year at $515 billion, up 5 percent from the 2016 volumes. MBA expects volumes to remain at roughly the same level in 2018.

“Despite a decline in property-sales transactions, commercial and multifamily mortgage originations were 15 percent higher during the first half of this year than a year earlier,” said Jamie Woodwell, MBA's Vice President of Commercial Real Estate Research.  “We expect stable property markets and strong capital availability to continue to support mortgage borrowing and lending in 2018."


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