U.S. commercial property prices resumed their decline as Treasury bill yields climbed.
Higher yields often go in tandem with increased interest rates that drive down demand for commercial properties, according to Chad Littell, national director of U.S. capital markets analytics for CoStar Group. That resulted in lower prices in August, the most recent data shows.
“Softer pricing in August may reflect rising Treasury yields," Littell said. "At the time when August property sales closings were likely priced and then placed under contract, the yield on the U.S. 10-year Treasury was 0.4% to 0.5% higher than in July. Treasury yields dipped to a low of 3.3% in May 2023. They have been advancing ever since and hit a high of 4.3% in August.”
Adding to the downward pressure on prices in August was that more new commercial properties came on the U.S. market. That increase in supply came at a time of lackluster tenant demand, according to Littell, who authors the CoStar Commercial Repeat Sales Indices report.
CoStar tracks when a previously sold property is sold again — a process called a repeat sale. The number of repeat-sale transactions increased to 1,100 closed deals in August, while total consideration rose to $7.9 billion. August bested the prior month, with transaction volume rising 8.3%.
The value-weighted U.S. Composite Index, which reflects big property sales common in major cities, fell 1.4% in August, resuming its downward trend where 11 of the past 13 months showed declines. The index was also down for the 10th consecutive month compared to the prior year, giving back 11.1% of its value in the 12 months ending in August.
Simultaneously, CoStar’s equal-weighted U.S. Composite Index, which shows the more numerous, lower-priced property deals more common in smaller markets, settled in August 0.3% below the prior month’s reading. The index oscillated around zero percent for the better part of the past year but edged 0.6% higher in the 12 months ending in August.
Supply, Demand Imbalance
New commercial space across the three major property types is projected to reach 813.5 million square feet in the 12 months ending in September, up 9.1% from the same time in 2022. About 89% of the space expected, or 723.2 million square feet, will be of investment-grade quality, an increase of 12.2% over the 12 months ending in September 2022.
As a percentage of total stock, new properties are expected to add 1.4% to the total inventory in the quarter ended in September, with investment-grade properties contributing 1.2% of new properties.
At the same time, tenant demand has eroded and should turn negative in the quarter, according to CoStar.
Net absorption, or the change in the number of square feet occupied, is projected to be 38.2 million square feet in the 12 months ending in September. That would be an 89% collapse from the 12 months ending in September 2022.
However, September is expected to see tenants giving back more space than they leased. As a percentage of stock, negative net absorption in the third quarter is expected to be 0.05% of space, mirroring levels last seen at the height of the coronavirus pandemic.
This month's CoStar Commercial Repeat Sale Indices provides the market's first look at property pricing trends through August. It is based on 1,100 repeat-sale pairs in August and more than 295,368 repeat sales since 1996.