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In a Troubling Time, Silver Lining Emerges for CRE Pricing

Despite uncertainty and volatility that cloud the economy, there’s reason to be a bit upbeat these days. A recent commercial property price report from researchers at MSCI’s RCA division shows the RCA CPPI National All-Property Index climbed 18.5% in June 2022 from a year prior. That’s close to the pricing growth rates of recent months and not far from the 19.5% record pace seen at the start of 2022. The index rose 1.3% from May.

Industrial and apartment sector price increases were again the strongest among the property types amid continued investor demand for these assets. For industrial, the warehouse subtype has shown bigger price gains than the flex subtype, and for apartment, garden assets have eclipsed mid/highrise buildings.

  • The industrial sector outpaced all property types with the highest annual and quarterly growth rates, up 26.9% Year-over-Year and 4.8% from the first quarter. June marked the ninth consecutive month of annual price growth greater than 20%, according to RCA’s report.
  • The apartment index followed the industrial index with a 23.7% increase from a year prior. Apartment sector prices rose 1.6% from May, the highest monthly rate among the property sectors.
  • The annual pace of growth for the retail index was little changed in June at 18.8%. Retail price growth has retreated only 110 basis points from the record high achieved early in 2022. The centers subtype has eclipsed price increases for shop space.
  • Suburban office price growth has slowed since its peak annual growth rate of 15.0% in September of 2021, posting only a 9.7% Year-over-Year increase in June. Gains in the CBD office index also eased. The index rose 7.6% in June from a year prior and was unchanged from May.

Annual price growth in the six major metros RCA tracked slowed further in June, slipping to 11.7%. Price growth in the non-major metros also dipped slightly, to 20.1% Year-over-Year.

What the researchers at RCA notice is that price growth across property sectors and subtypes has generally followed deal volume over the last year. The found that over the last year no sector or subtype has yet shown an annual decline in activity or pricing, despite what might come in the year ahead.

Price growth was weaker for the CBD office assets, with the RCA CPPI for this subtype up only 7.6% Year-over-Year. That said, the annualized rate of change in CBD office prices from Q1 2022 was only 2.6%, well below the current pace of inflation.

The RCA CPPI for suburban office assets, by contrast, was up 9.7% from a year earlier and up 7.8% on an annualized basis from Q1 2022. There was stronger price growth for suburban offices then, but a bit of a disconnect with less momentum in the growth for deal volume. Before the interest-rate-driven shocks to the market set in this year however, CBD office sales had been on a bit of a rebound. Given the recent moves by the Fed to raise rates that upward trend may be challenged.

The retail sector shows the widest bifurcation for growth in sales across subtypes. Shopping center sales rose 186% over the 12 months through Q2 2022, while sales for shop space rose only 52%. Recent inflation moves and a rebound for in-store consumer spending push investors to favor shopping centers because income growth is more achievable in these assets than in the shop space segments that are heavily weighted to triple net assets.

RCA reports garden apartment assets posted stronger growth in prices over the last year than did the mid/highrise segments — up 27.2% vs. 12.6% Year-over-Year. And yet, growth in deal volume was stronger for the mid/highrise segments (up 129% Year-over-Year over the four quarters to Q2 2022) than for garden apartments (up 104% Year-over-Year). Growth for individual asset sales was stronger for mid/highrise assets than for garden apartments, and more entity-level deals in garden apartments explains the difference.

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