A 'Weaker Trend' Looms For CRE As Hotel Prices Slide In June

Prices for the different types of commercial real estate sectors, from industrial to office and everything in between, had been moving generally in the same direction. Not anymore. 

Hotel prices fell by 9.3% year-over-year in June, apartment values slid by 1.7%, and industrial slipped 0.4%, its first negative reading this cycle, according to MSCI’s monthly sales report. Retail prices were essentially flat, but suburban offices clocked a 3% gain from the prior year to take the crown as the industry's best performer in June.

“Sectors are not moving in unison this cycle,” MSCI analysts wrote in the report. “Property types are being priced on their own fundamentals rather than as a single asset class moving together driven by broader financial sector moves.” 

Transaction volume totaled $136.6B in June, up 14% from the prior year, with overall prices drifting upward by around 90 basis points. The total was boosted by entity-level and portfolio sales. Portfolio sales, which accounted for a quarter of activity across the month, were up 38% on the year, compared to a 4% increase in single-asset deals, which totaled $102B. 

Both figures indicate that buyers are coming off the sidelines, with dealmaking continuing at a healthy pace even before accounting for entity-level deals, MSCI analysts wrote in an analysis with the sales data. But MSCI Chief Economist Jim Costello said taking a broader look at the numbers alongside historical trends suggests that momentum may not be waning. 

Capital markets firms are typically more focused on raising capital than deploying it in the first and second quarters, with deal volume generally picking up across the back half of the year. Costello’s models suggest the pace of deals in the second half of the year could underperform compared to last year.

“Because of the structural issues in capital raising and deployment, the first and second quarters of the year suggest a weaker trend than published,” Costello wrote in an email to Bisnow on Monday morning. “Not a collapsing market by any means, and a pace for the first and second quarter that’s still better than last year, but weakening from the fourth quarter of last year.”

Boston, Chicago, Los Angeles, New York, San Francisco and Washington, D.C., attracted 47% of U.S. investment. Suburban offices and hotels were the only asset classes whose prices swung by more than 2% in either direction from the prior year. The second-largest decline was a 1.7% dip for apartments, while offices in urban cores clocked a 1.2% price increase, less than half their suburban peers but better than any other asset class. 

Multifamily assets attracted the most capital in June, with $36.7B in sales, followed by industrial assets at $32.5B. Apartment sales volume was essentially flat, while industrial sales volume jumped 27% on the year. Together, the two sectors accounted for roughly half of the month's deal volume. 

The amount of capital flowing toward data centers, at $7.7B, is roughly in line with investment in other alternative assets, but the 23 deals were an 1,806% increase in volume from last year. 

The three largest portfolio deals to close last month were the acquisition of multifamily REIT Veris Residential, several Canadian firms’ $2B deal to buy Echo Realty, which owned 230 retail centers, and Brookfield Asset Management’s purchase of industrial outdoor storage operator Peakstone Realty Trust.