Prices for all property types shrank across the country compared to the second quarter of last year as sale volume fell sharply in June and declines spread to smaller properties and markets.
The multifamily and office sectors showed the biggest annual and quarter-over-quarter price declines among the major property types in the three months that ended June 30, according to the latest CoStar Commercial Repeat Sale Indices, based on data from repeat sales of commercial properties.
“We see rapid value deterioration when you look at pricing changes across property types and regions,” said Chad Littell, national director of U.S. capital markets analytics for CoStar and author of monthly report on the indices. “No region has been spared. All four U.S. regional indexes fell into negative territory year over year for the first time in this cycle."
The two main U.S. composite indices measuring commercial property pricing have been decelerating year over year since the first half of 2022 as markets respond to rising interest rates. The Federal Reserve this week approved the 11th rate increase since March of last year, taking the benchmark borrowing rate to its highest point since early 2001.
Despite slight gains in the past two months, the value-weighted index that reflects big property sales common in major cities has declined steadily year over year in 2023 across office, industrial, retail and multifamily, Littell said.
The value-weighted sub-index for major multifamily sales fell 2.4% in the second quarter from the prior three months. It fell 14% from the second quarter of 2022, a time when U.S. apartment prices peaked.
“As the most interest rate-sensitive property type, multifamily’s about-face has been dramatic,” Littell said. “Annual multifamily property values grew by 25% year over year in the first quarter of 2022, and then fell 14% year-over-year in the second quarter of this year. That’s a swing of 39 percentage points.”
Smaller Market Demand Eases
The equal-weighted indices, which show the more numerous lower-priced property deals more common in smaller markets, have slowed dramatically across U.S. regions and property types from the strong annual price appreciation logged in the first half of last year, Littell said.
The equal-weighted U.S. Composite Index that has steadily receded since its May 2022 fell 1.1% in June from the same month a year earlier. That's the first annual drop in the lower-end property index since February 2012, during the long recovery after the Great Recession, according to Littell.
National office prices reflect the deep declines in occupancy and sales, which have fallen to the lowest point since the third quarter of 2010. The transaction volume total included the trading of many distressed properties.
Equal-weighted office prices slipped by 1.6% in the second quarter from the prior three months, a smaller decline than the 2.2% quarterly drop in the first quarter and the 3.1% decrease in the fourth quarter, according to the report.
However, the equal-weighted office index decreased 7.1% over the 12 months ended in June. Value-weighted offices took a larger hit, with the index falling 14.2% in the 12 months and almost 21% since the end of 2021.
The general commercial segment, a sub-index of CoStar’s measure of sales typical in smaller markets, fell 0.8% in June from the prior month, its first monthly decline since January. The sub-index, which peaked at 18.4% year-over-year growth in May 2022, might dip into the red during the second half of the year, Littell said.
Overall repeat-sale transaction volume declined almost 48% from the 12 months ended in June, with the pullback most pronounced at the upper end of the property market as the investment-grade segment dropped about 53%.
However, the general commercial segment fell 36.5% over the same time, and more decreases appear to be coming, Littell said.
“The smaller private-buyer sentiment is now catching up so we’re seeing pricing declines at the lower end of the market as well,” he said.
The West’s value-weighted index is down double-digits on the year and the South is not far behind, shedding 9.2% of its value since the second quarter of 2022, he added.