U.S. commercial real estate property prices were mixed in July, but small-dollar deals had their lowest price gains in a dozen years in a sign that individual investors powering purchases in an era of high interest rates are buying less.
Year over year, prices for commercial property purchases typically made by individual investors rose 1.7%, the slowest pace of growth since July 2012, according to CoStar Group’s Commercial Repeat-Sale Indices. The indicator tracks when a previously sold property trades hands again in a process called a repeat sale.
These repeat commercial property sales carried a "subtle but telling shift” in July, as investors in smaller properties began to lag behind large firms that favor property purchases in big cities, said Chad Littell, national director of U.S. capital markets analytics for CoStar and the author of the CCRSI report.
“This marks a clear deceleration from the steady 4% annual gains we’ve seen in previous months — a sign that this market segment is losing some steam,” Littell said. “For the past two years, individual investors have been the driving force behind this market. But now, even they are beginning to pull back.”
Littell said private investors were the slowest to respond to the Federal Reserve’s interest rate increases through last summer, and now that they’ve exhausted their capital, they are buying with less aggression. As a result, some properties are sitting on the market longer.
The result from the July CCRSI report shows up in its equal-weighted U.S. composite index, which tracks sales in small markets and offers a glimpse into the investing preferences of individuals more than large firms that favor big cities.
Small-Deal Prices Fall
The index tracking small-priced deals in small markets overall moved just 0.2% higher in July over June, and was 1.6% below May and down 0.7% for the 12 months ended in July. That's the first annual pricing decline in the equal-weighted category since February 2012.
The equal-weighted index is broken down into two sub-segments: an investment-grade index more heavily influenced by high-dollar transactions, and the general commercial index affected mainly by smaller, lower-priced properties.
The general commercial sub-segment saw the slowest annual appreciation since June 2012, while the investment-grade sub-segment broadened its annual price declines.
This shift was expected as individual investors trail the larger, institutionally minded investors in adjusting their strategies, Littell said. Institutional investors started altering strategies as early as the second quarter of 2022 when the Federal Reserve’s rate hikes were felt.
“In contrast, private buyers kept pushing forward as if nothing had changed,” he said. “But the tide is turning. As we look ahead, we’ll likely see annual appreciation in the general commercial segment dip into negative territory before the year is out.”
Meanwhile, the CCRSI value-weighted U.S. composite index, which is more heavily influenced by high-dollar trades common in major markets, declined for the third consecutive month, falling 1.4% from June.
The value-weighted index extended its losses compared to the prior year, down 13.5% in the 12 months ended in July. Compared to the all-time high in July 2022, the value-weighted index was off by 22%.
This month's CCRSI is based on 1,222 sale pairs in July and 309,561 repeat sales since 1996.