Nationwide commercial pricing dropped 0.1% in May, a return to the slump the market has experienced since the election.
Valuations rose in April, the only month since the election of President Donald Trump that commercial pricing improved in all five property sectors, according to Ten-X’s monthly pricing index — which combines Google Trends data, proprietary transaction data and investor surveys to determine commercial real estate pricing trends in real time.
“The broader tide of uncertainty is just sort of having an impact on all these numbers,” Ten-X Chief Economist Peter Muoio said. “It is sort of disappointing. The data is the data, but it does suggest that we’re not out of the woods.”
Despite the slowdown since November, the industry is still experiencing a record run of rising valuations, with experts projecting the market still has room to grow.
Here are how the five main property sectors fared in May.
Retail: The Weakest Link
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Of the five main property sectors, multifamily and office posted pricing gains, while hotel, industrial and retail pricing sank in May. Investment activity in the retail sector has suffered from store closures, retailer bankruptcies and e-commerce competition. Ten-X data reveals retail pricing declined 1.2% in May — a sharp pivot from April’s 3.6% gain, and the largest decline of all five sectors. Investor activity in the Southwest did see some growth this month, Ten-X reports, as investors in the region capitalized on burgeoning housing markets and booming populations.
Multifamily: Peaking Prices
Investor activity in the apartment sector remained robust in May, marking its 18th consecutive month of growth. Nationwide apartment pricing increased by 0.8% in May and 15.2% in the trailing 12 months. Though tightening cap rate spreads and shrinking returns suggest apartment valuations are reaching their peak, Ten-X reports investors have not been deterred.
Apartment landlords can expect a dramatic shift in demand when 320,000 new apartment units come online in 2017, the largest wave of new supply to hit this cycle, according to Yardi Matrix — though Yardi Operations Manager Doug Ressler said landlords likely will not feel the impact of the dramatic inventory influx until much later in the year.
Office: Tight Labor Market
A tight labor market coupled with historically low unemployment levels continue to drive demand in office real estate. Pricing was up 0.3% month-to-month, and 22.3% for the 12 months ending in May. Experts foresee continued strength in office real estate despite political and economic uncertainty, though new supply may push up vacancies later in the year and soften the sector.
Hotel: Negative Movement
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Hotels broke an 11-month streak of declining pricing in April when rates advanced 1.3% month-to-month. But those gains reversed in May, with pricing in the sector dipping 0.2%. Ten-X said an influx of new supply in the segment, coupled with declining international travel, is of concern to investors, but pricing is still up 2.6% year-to-year.
U.S. hotel rooms under construction increased nearly 15% in April compared to a year ago. There are 4,843 hotels in the pipeline, totaling 580,427 rooms (this includes projects under construction, in the planning stages and projects that are still unconfirmed), STR reports.
The delivery of new supply is considered one of the biggest threats to established hotels. Unlike other sectors, hoteliers are not guaranteed a steady inflow of cash from long-term leases since their tenants come and go daily. As such, new supply can be extremely disruptive — which explains the industry’s abhorrence to Airbnb, which it considers new supply.
Industrial: A Surprising Dip
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Of the three sectors that experienced a dip in pricing in May, industrial was a surprising addition. Industrial real estate has been booming, benefiting from major growth in the e-commerce retail sphere. Demand for distribution and warehouse centers on the outskirts of markets with dense populations sent industrial vacancies to 30-year lows in Q1 and net absorption rates skyrocketing for 28 record-breaking quarters.
So Muoio was surprised by the pullback in nationwide investment activity in the sector in May. Industrial pricing contracted 0.6% and is a mere 5.5% above the year-ago level.
“It will be interesting to see if this is a one-off glitch,” Muoio said.
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