Slowdown for CRE Prices and Deal Volumes?

Has CRE's string of good luck come to an end?

Commercial real estate’s had a good run (mostly) in the years after the end of the recession, with values rising, upticks in rents in most property types in a lot of markets, occupancies likewise rising, and thus investors more interested. The question now is whether the advances in CRE markets will moderate or slow down or even reverse themselves. There’s no answer yet, but data from CoStar points for now to more moderate growth in the commercial real estate sector—with the usual caveat that one month’s data is only one point on a line, and that long-term trends aren’t generally predicted on a month-to-month basis.

Even so, it’s worth noting that following strong gains in the first quarter of 2015, composite CRE prices saw a slight dip in April as sales activity moderated from its recent brisk pace, according to CoStar. The company’s value-weighted U.S. Composite Index and its equal-weighted U.S. Composite Index decreased by 0.7 percent and 0.8 percent, respectively, in the month of April. It’s entirely possible that April is a mere blip, since both indices have risen more than 2 percent over the last three months and are up more than 12 percent for the 12 months ending in April 2015.

More specifically, within CoStar’s equal-weighted U.S. Composite Index, the U.S. Investment Grade segment—which is weighted toward high-value properties—dropped by 1 percent in April. The U.S. General Commercial segment, which includes sales of lower-tier properties, declined by a not-so-different 0.8 percent during the same period. Sales volume in April was down nearly 24 percent from the record-setting monthly rate during the first three months of this year. Even so, April’s sales volume was still ahead of the same month a year ago, so perhaps the outlier in this case was a spike in sales volume in Q1, which would mean that April’s still a fairly strong sales number.

So is it a pause or the beginning of a slower market? Too soon to tell, and there are also a number of wild cards. Considering the recent strong run of employment numbers, the Federal Open Market Committee, which will make a policy announcement this week, is probably weighing an interest-rate increase more seriously than only last month (though probably not for the June announcement). But when they come, interest rates are bound to have some impact on CRE markets. On the other hand, the uptick in growth and recent consumer confidence might prove to be short-lived, with continuing sluggishness possibly affecting the health of CRE markets. By contrast, the upcoming economic turmoil in Europe might actually bode well for US commercial properties, as investors pull commitments from the EU nations and put more into that old standby safe haven, the United States.