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Commercial-property price gains decelerate

Commercial-asset price growth cooled off a bit this summer, but some sectors are still experiencing rapid gains in sales prices, despite being at record levels already, according to leading price indices.

Real Capital Analytics’ (RCA) all-property index rose by 0.7 percent in July and 7 percent year over year. The index, which is based on the sales prices of properties valued at $2.5 million and above, has registered a slower annual pace of growth for four consecutive months.

creassetAmong the asset types, apartments saw the biggest monthly and year-over-year gains of 1.2 percent and 12 percent, respectively, according to RCA.

Only industrial-asset prices declined in the month, falling 0.3 percent, RCA reported. Year-over-year, all the property types saw an increase in sales prices. Year-over-year office properties were up 7.6 percent; industrial, 6.1 percent; and retail, by 1.8 percent. The sales prices for office properties located in central business districts (CBD) rose by 0.6 percent in July, and were up 1.3 percent year over year. Suburban office properties continued a recent hot streak, rising 1.3 percent in the month and 8.5 percent year over year.

At the beginning of the year, CBD office properties were posting sales-price declines. The recent gains have largely been driven by the recovery of the Manhattan market, RCA analysts have said.   

Prices have been rising at a quicker pace in secondary markets (up 7.6 percent year over year) than in the six major metros (up 5.7 percent).

Other indices either showed entirely flat or slowing growth.

CoStar's value-weighted U.S. Composite Index, which reflects prices for larger-asset sales, posted no change in July, but was up 5.9 percent year over year. CoStar’s equal-weighted index, which reflects the sales of lower-priced assets in non-major markets, rose 1.3 percent in the month and has seen an annual gain of 3.7 percent. Within this index, however, lower-end commercial properties located in smaller markets have shown the fastest price gains, CoStar said.

The company also said that asset sales are running ahead of the pace of last year. In the 12 months through July, sales volume totaled $137.5 billion, up 3.8 percent for the same 12 months to July 2017. 

"Commercial real estate fundamentals remained in solid shape in the second quarter of 2018, with cyclically low vacancies and sustained rent growth supporting price gains across most property types and regions," CoStar reported. 

Green Street Advisors reported that its national index was unchanged in July and has been flat over the year. Of note, Green's Street's index is 27 percent higher than its previous 2007 peak. Green Street analysts reported that certain asset types, such as industrial properties and medical-office buildings, are posting strong gains this year. Green Street’s index is based on appraisals of the assets held in portfolio by real estate investment trusts.

Jamie Woodwell, vice president of commercial real estate research, said that as the pace of price growth slows, investors are placing more emphasis on a property's income-earning potential. In that regard, the market is in good shape, he said. 

“There has been a shift in focus from appreciation to income as the key driver of investor returns in coming years,” Woodwell said. “Rising interest rates are expected to put pressure on cap rates, but investors anticipate a strong economy will support property incomes and help to sustain overall property-investment returns.”


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