Property Price Uptick? Such a Long Long Time to be Gone and a Short Time to be There
It’s often difficult to interpret short-term pricing data that is meant to give market participants clarity. Take for example, the CoStar Commercial Repeat Sale Indices. These indices take stock of many facets of the commercial real estate market. They do so in such short-term increments, that we as investors can often overread the data to form conclusions that can be misleading. Given recent months positivity, it’s easy for some folks to start looking at the current economy and suggest that all is well despite evidence to the contrary.
Why?
Because a healthy market has opportunistic buyers and sellers at all points of the cycle. Clearly the last year has been anything but kind to the broader CRE market. As we delve into the data, however, some months will appear more or less positive based on what transactions happened in the month. For example, in May, the composite index, which is a subsector of large cities, saw an uptick of 1.3% month over month after 9 months of declines.
That said, this measure is still down 8.5% from a year ago. The year over year measurement is depressing for sure. But the incremental change is very encouraging, even if it is early. As we look forward, there are some headwinds that will clearly make it difficult for the market to form a new upward trend. At least 2 more interest rate hikes at the Fed, absorption of construction projects, and large refinancings of interest only loans stand in the way of improvements in many commercial real estate market improvements.
However, the uptick in pricing suggests to us that much of the downward pressure from the last 12 months has finally triggered the animal spirits of more aggressive investors. This is a fantastic sign for the overall health of the market. First, it tells us that there is some level of impatience to get back involved, because this market has made investors so much money over many years. Second, it tells us that there is financing available for the right deal. And, third, investors are willing to look past intermediate volatility with the opportunity is great enough.
We’re not in a hurry to play knife catcher, but we are starting to find many more pockets across the country where sellers are willing to take a more serious look at their investments, and rationalize their portfolios. Obviously, one man’s trash can be another man’s treasure, and the current negative headlines are pressing investors to reconsider which is which.
Sources: CoStar, CoStar Group
