Commercial real estate pricing declined in December for the eighth consecutive month, dropping 0.3% from November, according to a recent Ten-X report. This is estimated to be only 1% higher than the year prior.
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“One of the biggest reasons for the recent declines in pricing across all CRE sectors is a pricing expectations gap between buyers and sellers. Many sellers are demanding premium pricing, while buyers have been more hesitant in the face of higher interest rates earlier in 2017, tight cap rates and a variety of challenges to growth that many sectors are facing. This gulf has been a primary factor in lower deal volume and slowdowns in pricing, especially in the retail, apartment and hotel sectors," Ten-X Chief Economist Peter Muoio said.
Retail was one of only two sectors to show positive pricing gains within the western portion of the U.S., showing the largest rise of 2.1%. Nationally, the retail sector grew by 0.4% in December. The hotel sector was the other to experience a rise in pricing, with valuations increasing by 0.8% in December. Pricing in the segment is up 2% from the year before. This is the largest jump since May and can be attributed to a number of factors, including a weaker dollar and improved economic conditions globally.
The office market declined last month to 1.6% and declined 0.8% from 2016. The drop was present across all markets in the U.S. with tenant expansions reaching their lowest level since 2012. Industrial pricing also dropped in December to 0.6% and is down 3.5% from 2016. It was the weakest pricing movement of all sectors. This could indicate that investors are becoming more wary about the potential speed at which industrial supply could enter the market.
"We do believe this ‘gap’ will begin to close in 2018, and it will do so due to sellers accepting the new paradigm. The lack of appreciation over the past year will temper expectations, as will continued tepid fundamentals in the coming quarters,” Muoio said.
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