What are the latest trends in commercial property values and prices in the U.S, and what is the trajectory for values/prices going forward? The latest data suggests that there is no simple answer to either of these questions. A review of four U.S. property price/value indices—from Moodys, Green Street, NCREIF, and CoStar—released in the past several weeks reveals that investment grade commercial property values and prices were either down 3.3 percent, flat, up 1.61 percent, or up 5.48 percent in the most recent reporting periods (these periods varied for each index). While the prevailing trend is up, there has been a good deal of bumpiness along the way.
The indices show that there is considerable variation regarding when the market turned, the value/price trends over the past year, and the current value/price trends. And there is also a good deal of up and down variation in prices in recent months within some of these indices, suggesting that a smooth upward glide pattern from recent lows should not be assumed.
The four indices discussed here use different methodologies for tracking prices and values, and they mark different turning points in the pricing of commercial property over the past two years, as outlined below. The strength and consistency of the price upturn in 2010, as measured in the indices, varies considerably, and in fact the Moodys index actually recorded a new low for prices in its most recent data for August 2010.
Commercial Property Price/Value Indices
|Value/Price Inflection Point
||Current Value/Price Change|
|Green Street Advisors
Commercial Property Price Index
|May/June 2009||0 % (Oct.)|
Property Price Indices
|November 2009||-3.3 % (Aug.)|
CoStar Commercial Repeat-Sale
|January 2010||5.48 % (Sep)|
|NCREIF Property Index||2nd quarter 2010|
The index with the longest history—the quarterly NCREIF Property Index—did not show a turning point for prices until the second quarter of 2010. Their data shows price declines from the second quarter of 2008 until the second quarter 2010, when values increased by 1.61 percent, followed by a third quarter increase of 2.23 percent. Notes Roy Rendino, NCREIF’s CEO, “We continue to see a bifurcation whereby highly leased properties in recovering cities and the apartment sector significantly outperform the rest of the market.” The NCREIF index represents institutional real estate investments, and values are based on appraisals from participating institutions.
The index showing the most consistently positive value trends over the past year, from Green Street Advisors, marked a turning point in prices back in May/June of 2009. The Green Street Advisors Commercial Property Price Index (GSA CPPI), a monthly index that estimates the private market value (the underlying net asset value) for REIT portfolios, rose by 3% in September but showed a flat 0% change in October. They note that “Property values have now risen nearly 30% from the ’09 trough, which means that almost half of the decline that occurred from ’07 to ’09 has been erased. Nevertheless, values remain roughly 20% shy of their peak.”
The least positive index for value/price trends over the past year, the Moody’s/REAL Commercial Property Price Index (CPPI), marked a turning point in prices in November 2009, and most recently recorded a 3.3 percent decline in August, following on a 3.1% decrease in July, bringing the index to 105.37, the lowest recorded result since the beginning of the recession. This is the third consecutive month in which this index has shown a price decline in excess of three percent. The CPPI is currently 45.1 percent below the peak that occurred in October 2007. According to Moodys, “The data suggest that the commercial real estate market has become trifurcated, with prices for larger trophy assets rising, prices for distressed assets declining sharply, and prices for smaller but healthy properties remaining essentially flat.” In the most recent data, “large negative returns on distressed properties created a drag that outweighed the positive and flat results of the performing properties.” The Moody’s index measures the change in actual transaction prices based on the repeat sales of the same asset at different points in time.
Finally, the most recent entrant to the commercial property value/price business—the CoStar Commercial Repeat-Sale Indices—finds an inflection point in January 2010, and most recently the investment grade component of the index showed a strong 5.48 percent increase in September following a 3.73 percent increase in August. This index did show considerable volatility and price declines during the middle of 2010, and is down 29.08 percent from two years ago and down 4.89 percent from the same period last year. CoStar notes: “For the first time since the second quarter of 2007, the four primary property types within the commercial real estate repeat sales index showed an increase in pricing in the third quarter.” They also point out: “Since 2007, the ratio of distressed sales to overall sales has gone from around 1 percent to about 22 percent currently.”
What is the bottom line for investors in these indices and price/value trends? While property prices and values are likely past their lows generally, a good deal of uncertainty remains about the steadiness and slope of further improvements. While the trend in values is generally upward, the patterns and trajectory of prices and values in the four indices vary considerably. Much of the value and price improvement over the past year has resulted from investors bidding up prices on a limited number of core properties available for sale, lowering cap rates on these properties. While fundamentals should improve over the coming year, bolstering the market, transaction volume is likely to grow as well, including more distressed properties and noncore assets coming to market. This could dampen overall pricing and slow value increases, adding further potential for volatility and choppy seas ahead. Values will not increase for all property types everywhere over the next year. Core properties will be richly priced while many distressed assets will come cheap but may not be worth the trouble. Choosing wisely will be challenging.