Commercial real estate prices fell across property types in the fourth quarter except for industrial real estate, a property type benefiting from increased consumer spending.

The value declines from the prior three months for office, multifamily and retail properties were greatest among investment-grade properties that as a group consist of larger-sized real estate that matches the type most often purchased by institutional investors, according to a CoStar Group analysis.

The findings for December and the quarter, the most recent data available, are part of CoStar’s Commercial Repeat-Sale Indices that track when a previously sold property is sold again in a process called a repeat sale.

The growth found in industrial property values comes as demand for space in 2023 remained positive, according to CoStar industrial analysts. While industrial space leasing lost steam in the back half of the year, early signs of a stabilization and eventual recovery in tenant demand are already emerging.

Overall consumer spending has sped up since last spring as inflation has subsided and job and wage growth has persisted. The demand for consumer goods, which helps to drive warehouse leasing, may well set the stage for industrial space needs to pick back up in late 2024 and for rent growth to accelerate thereafter.

For the month of December, the value-weighted U.S. composite index, reflecting big property sales common in major cities, declined for the fourth consecutive month, dropping 1.4% over the prior month. In addition, the index was down 9% in the 12 months ending in December and was off by 15.8% from the July 2022 peak.

Meanwhile, the equal-weighted U.S. composite index, which shows the more numerous, lower-priced property deals typical in smaller markets, matched the value-weighted price movement, with a 1.4% slump. However, the index increased by 1.9% in the 12 months ending in December.

“The equal-weighted index peaked 14 months after the value-weighted index as large, institutionally minded investors responded to rising interest rates first,” said Chad Littell, national director of U.S. capital markets analytics for CoStar and author of the report. ”At some point, the value-weighted and equal-weighted lines will converge. There is a real possibility of a downside scenario where the value of lower-priced property deals in smaller markets converge lower.”

Compared to the third quarter, the industrial sector stood out as the single property type that saw rising property values. Compared to the prior quarter, the equal-weighted industrial index was up 0.3% in the fourth quarter and 7.8% in the 12-month period ending in December.

The value-weighted industrial index fared worse, and though it grew 0.5% over the third quarter, the index gave back 3.2% of value in the 12 months ending in December.

Since the Federal Reserve began tightening monetary policy in March 2022, commercial property values have been declining across every major commercial real estate sector as higher borrowing costs and slowing rent growth limit what investors are willing to pay for new acquisitions.

However, capitalization rate increases for industrial properties have paused for now, and continued capital flows into the sector may contain future increases indefinitely, according to Littell.

The value-weighted office index values plunged 26% from the peak in the fourth quarter of 2021. The index was also down 10.8% compared to the fourth quarter of 2022 and 1.9% lower than the third quarter of 2023.

The equal-weighted office index experienced the mildest price declines, shedding 2.1% over the prior quarter, 2.7% over the prior year, and 6.9% compared to the peak in the second quarter of 2022.

The value-weighted multifamily index slipped 0.3% in the fourth quarter and 11.1% in the 12 months ending in December. Furthermore, from peak pricing witnessed in the second quarter of 2022, value-weighted multifamily index values were down 18.3%.

The equal-weighted multifamily index values were the strongest in December. The index was flat over the prior quarter, down 0.5% over the prior year and off by 9.5% from the peak.

Compared to the peak in the third quarter of 2022, the value-weighted retail index shaved off 2.5% of value in the fourth quarter and lost 0.5% of value compared to the third quarter of last year.

The equal-weighted retail pricing may have peaked in the third quarter of 2023 before edging lower in the fourth quarter with a 0.2% price decline. The index gained 2% when compared to the fourth quarter of 2022. However, price declines were evident across multiple durations in the value-weighted index.

This month's CoStar Commercial Repeat Sale Indices is based on 1,178 repeat sale pairs in December and 300,717 repeat sales since 1996.