U.S. commercial property prices are moving in opposite directions, with big deals in major markets rising while low-dollar deals in smaller areas fall.
Those results, from the September CoStar Commercial Repeat Sale Indices report, suggest a potential turning point for the low-priced part of the market that had generally outperformed when interest rates were higher in recent years. Meanwhile, the high-value portion of the market that had taken bigger pricing hits as a result of elevated borrowing costs is regaining traction among institutional investors.
The U.S. Federal Reserve has cut interest rates twice since September, a move that commercial property professionals expect to spur more sales. Commercial property brokerages have been reporting higher commissions from property sales in the third quarter.
To that end, the value-weighted U.S. Composite Index, more indicative of repeat sales — when previously sold properties trade hands again — expensive deals in major metropolitan areas, increased 1.6% in the third quarter from the previous quarter — for the second consecutive gain.
In contrast, the equal-weighted U.S. Composite Index, reflecting the more numerous but low-priced property sales typical of secondary and tertiary markets, fell 0.3% quarter over quarter. The index has now declined in three of the past four quarters and is down 1% year over year — the first annual decrease in 12 years. The equal-weighted index serves as a key barometer of small-investor activity and regional economies.
“The private capital segment of the market, which makes up a larger share of the smaller-dollar deals, appears to be losing its multiyear outperformance over large institutionally sized deals,” said Chad Littell, national director of U.S. capital markets analytics for CoStar and author of the report. “It's impossible to determine for how long, or if asset price growth, between small and large deals, will recouple in the future as they've historically been tied at the hip.”
Retail, office properties lag
The falling prices evident in the equal-weighted index are most common in the general commercial sub-index more heavily influenced by small, low-priced properties. This sub-index has fallen for four straight quarters, dropping 3.6% over that period.
Meanwhile, the investment-grade sub-index, more heavily influenced by high-value properties in secondary markets, increased nearly 6% quarter over quarter and posted comparable gains in the two previous quarters.
The two weakest of the four major property types led the price declines. Among property types nationally, the retail equal-weighted index struggled most, declining 2.1% quarterly and 2.6% annually in pricing. Office fell 1.8% quarterly and 2% year over year.
The equal-weighted industrial index performed strongest, increasing 1.3% quarterly and growing 2.4% year over year. Multifamily followed with a 1.2% quarterly gain and a 2.2% annual increase.
Regional performance
A closer look at regional prices reveals where the equal-weighted pricing index is losing ground.
The Midwest equal-weighted index fell 2.3% both quarterly and annually, despite multifamily rising 1.9% and industrial climbing 0.8% in the quarter. Office property prices dropped 1.9% while retail sank 1.8%.
The South equal-weighted index declined 1.4% in the third quarter but edged up 0.1% year over year. Three property types gained ground: office rose 2.1%, industrial climbed 1.2%, and multifamily increased 0.6% quarter over quarter.
The West lost 1.3% quarterly and 1% year over year. Multifamily led gains at 2.4% over the prior quarter, while retail, industrial and office all declined.
The Northeast equal-weighted index increased 0.8% quarterly but fell 2.6% year over year. Retail and industrial posted quarterly gains of 2.5% and 1.9%, while office shed 2.3% and multifamily lost 1.8%.
The data comes from CoStar’s analysis of more than 332,597 repeat sales since 1996, providing comprehensive pricing trends across U.S. commercial real estate markets. The September report reflects 1,347 sale pairs, with repeat sales volume falling 6.9% compared to a year ago.