Commercial real estate sale prices slumped in October from the prior month in a move consistent with yearlong trends caused by higher interest rates, according to a CoStar Group analysis.
CoStar’s Value-Weighted U.S. Composite Index, reflecting big property sales common in major cities, sank for the second straight month, dropping 1.4% last month over September. The index was down 8.7% for the 12 months through October.
Meanwhile, the Equal-Weighted U.S. Composite Index, which shows the more numerous, lower-priced property deals more common in smaller markets, posted its largest monthly decline since the Federal Reserve began increasing its policy rate in March 2022. The index slid 1.4% in October and was almost flat compared to October 2022, rising 0.2% over the prior 12 months.
The findings 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, with this month's CCRSI report providing the market's first look at commercial real estate pricing trends through October. The 1,168 sale pairs in October and more than 298,112 repeat sales since 1996 are considered the widest measure of commercial real estate repeat-sales activity.
The swing back to price declines in October was anticipated, according to Chad Littell, national director of U.S. capital markets analytics for CoStar, and author of the CCRSI report.
“The U.S. 10-year Treasury yield stagnated near 3.8% in July and August of 2023 before climbing to 4.9% in October,” Littell said. “That negatively impacted asset pricing for sale closings starting off the fourth quarter. The pronounced drop in pricing this month reflected the higher borrowing costs seen in July and August.”
The yield on the 10-year Treasury represents an important benchmark rate for commercial real estate lending. When this yield rises for an extended period, commercial real estate values fall, according to Littell.
The October yield of 4.9% was the highest of the year so far. Those higher yields are likely to weigh on prices in November and December, Littell added, and markets should see low transaction volume through the fourth quarter.
Transaction volume decelerated in October. Total consideration declined to $8.9 billion, down 2.4% from the prior month. Composite pair volume of $104 billion during the past 12 months was 54.8% lower than the 12-month period ended in October 2022.
Lower Investment-Grade Prices
The fall in transactions was steeper in the investment-grade property segment at 60.3% lower over the 12 months ended in October compared to the prior-year period. The segment accounted for about 59.9% of the annual transaction volume during the 12 months ended in October.
Investment-grade prices marched lower in October. After 10 months of price declines, the month marked the largest year-over-year price drop of investment-grade assets since March 2010.
The investment-grade sub-index of the equal-weighted index, more heavily influenced by higher-value assets, slipped 1.5% in October and dropped 12.1% over the 12 months.
The general commercial sub-index of the equal-weighted index, influenced by smaller, lower-priced assets, fell 0.9% in October but has gained 3.1% during the past 12 months.
Value-weighted price declines persisted in the multifamily sector. Prices have been declining over the past 15 months, with double-digit year-over-year decreases taking hold over the past eight months. Since peak pricing occurred in July 2022, the value-weighted multifamily index fell 19.8% through October.