Property Prices Fall Further, Weighed Down by Apartments

Article originally posted on CoStar on February 27, 2023

Transaction Volume Sputters Amid High Interest Rates

U.S. commercial property prices, particularly for apartments, declined in January as high interest rates drove the number of transactions to new lows.

CoStar Group reported lower prices in both of its closely watched composite indices that monitor price differences in repeat sales of the same property.

The value-weighted U.S. Composite Index, which tracks larger property sales common in major cities, fell for the sixth consecutive month, seeing a drop of 1% from December. The index was down 5.1% in the 12 months ended in January, showing a rare reduction in prices for a third straight month. In the value-weighted index, a $50 million property sale is calculated as 50 times more important than a $1 million sale.

The indices also include an equal-weighted method in which a $50 million property sale carries the same weight as a $1 million sale. Because there are many more sales of small properties than large properties, the equal-weighted index tends to better reflect price changes in small markets. That index retreated 1.3% in January over the prior month, after falling in six of the past seven months. The index has gained 3.8% over the past 12 months.

“Both composite indices have been on a broad deceleration trend in year-over-year growth for the last seven consecutive months as markets respond to an environment of higher interest rates as the Federal Reserve battles decades-high inflation,” said Chad Littell, national director of capital markets analytics for CoStar and author of the report.

The multifamily sector, which had driven most of the price gains in the value-weighted index over the past decade, has now fallen for seven consecutive months.

The multifamily sub-index fell by 1.3% in January and has posted price declines of 3.7% in the 12 months ended in January.

Without the multifamily sector in the value-weighted index, commercial property prices would have climbed 0.9% higher.

Apartment net absorption, or the difference between move-ins and move-outs that reflects demand, “reached historic highs in 2021 in response to pandemic-era effects on the housing market, motivating double-digit annual price gains,” Littell said. “However, affordability destruction through rental rate growth and a wave of new supply have together dampened absorption.”

Transaction volume fell in January to its lowest level since August 2020. Repeat-sale transaction activity fell sharply to $6.3 billion, a 51% decline from the prior month. Pair volume of $187.6 billion during the 12-month period ending in January was 12.7% lower than the 12-month period ending in January 2022.

“The falloff was due to a steady volume decline through the back half of 2022, with January 2023 posting a fraction of the sales from the prior year,” Littell said.

The indices provide the market’s first look at commercial real estate pricing trends through January. Based on 1,302 repeat-sale pairs that month and 286,595 repeat sales since 1996, the indices offer the broadest measure of repeat-sales activity.