Trepp regularly watches property prices, using an index technique to show relative strength compared to some baseline year. Right now the Trepp Property Price Index, self-described as a “vital tool for gauging the health of commercial real estate,” has seen a continuous decline since mid-2022.

Quarter over quarter, it declined 1.8% in Q2 of 2023 and 5.4% since the end of Q2 in 2022. “This trend continues the decline in CRE property prices that began in March 2022 with the initial interest rate hike,” they wrote. “As interest rate hikes appear to be slowing down, some markets are showing signs of stabilizing prices.”

The compilation of the figures “is an equally weighted index derived from sales transaction data, utilizing a repeat sales methodology.”

Like an inverse of inflation, real estate prices are still falling, but that rate is slowing.

The amount depends on the type of property. Trepp has a chart showing property type and the percentage of properties sold at a loss in 2022 Q2, 2023 Q1, and 2023 Q2. • Industrial: 7.4%, 14.2%, 10.5% • Multifamily: 6.9%, 21.1%, 17.9% • Office: 19.2%, 23.7%, 20.4% • Retail: 16.9%, 23.2%, 22.1%

There are also disparities, as anyone in the industry might expect, by geographic region. As Trepp notes, “states such as Florida and Illinois exhibit a significantly lower percentage of properties sold at a loss in 2023 Q2 compared to 2023 Q1.”

In states that have seen worsening conditions — some increase in the percentage of properties selling at a loss between 2023 Q1 and Q2 — the actual counts of numbers of properties haven’t increased that much. California overall stayed at 15.3% in Q1 and Q2, which went from 426 to 443. Michigan went from 31.2% to 41.2%, but that was 16 in Q1 and 17 in Q2. Pennsylvania’s percentage increased from 15.5% to 22.2%, which was actually a drop from 58 to 54.

Part of this is the continued fall of transactions numbers. As multiple sources have been telling GlobeSt.com over the last 12 months, those who are selling properties are more likely than not in situations where they have to get rid of an asset, either to manage a maturing loan where refinancing would need an injection of capital or some other reason requiring a sale.

Trepp said that “price declines are, at the very least, starting to stabilize in many markets.”

Source: “CRE Price Declines are Starting to Stabilize“

Rents in October fell by $3, according to Yardi Matrix, marking the second consecutive month of downward data. The Northeast and Midwest showed modest growth, but it was offset by declines in the Sun Belt and West.

The average U.S. asking rent fell $3 to $1,718 in October, while year-over-year growth fell to 0.4%, down 40 basis points from September.

Meanwhile, US average single-family rents declined by $2 to $2,121 and year-over-year growth dropped 30 basis points to 1%, but demand is holding steady and occupancy rates remain firm.

For the year, through September, more than 250,000 apartment units were absorbed nationally, according to Yardi Matrix.

“That is below the record-high 600,000 units absorbed in 2021, but in line with 300,000-plus units absorbed each year between 2017 and 2020,” according to the report.

“Whatever else is happening, people continue to rent apartments at a steady rate. Rent declines are largely a function of supply.

“There is concern that apartment demand will slow if the economic growth turns negative in line with consensus forecasts. A downturn would likely reduce renter activity.”

At the same time, Yardi Matrix indicated that multifamily demand is boosted by long-term trends that aren’t likely to fade.

“The cost gap between renting and homeownership has rarely, if ever, been higher, which keeps households in apartments. Demand is also created by the hybrid work trend as people seek more space for work.

Source: “Apartment Rents Fall a Second Straight Month – This Time by $3“

Since the COVID lockdowns, one of the pervasive market narratives has been the demise of commercial real estate. With many Americans now working entirely remotely or in hybrid arrangements, offices are much less central to white-collar jobs. That impacts the market for office buildings, but also businesses in downtown areas of cities across America. Without office workers flowing in and out of city centers, businesses from sandwich shops to barbershops have taken hits.

Despite offices making up less than 5% of the real estate sector*, combining these concerns with the headwinds of rising rates has cast a pall over the entire REITs market, which has underperformed broader equities markets this year. Still, could CRE fears actually be overblown?

Analysis from Fidelity Investments suggests that despite the challenging backdrop, fundamentals in the commercial real estate space remain sound. Except for offices, demand remains strong enough to boost rental rate growth across the sector. Funds From Operations per share growth, a common metric of fundamental strength in the space, remains close to the average of the last five years, at 5.8% as of 9/30.

Supply and demand have balanced out, as new CRE supply in U.S. metro areas is declining owing to higher capital costs and tighter credit conditions. The result is often a sound fundamental backdrop, with supply and demand reasonably balanced. While some observers have noted concerns about bank exposure to CRE loans amid high interest rates, the diversity of bank lenders remains a helpful source of risk mitigation.

Plays for the Portfolios

Commercial real estate can still play an important role in investor portfolios. Whether via investing in real estate as an alternative or in real estate firms as an equity play, the space can offer potential benefits ranging from diversification to REIT-based income.

One ETF to consider, for example, may be the Fidelity Real Estate Investment ETF (FPRO). This actively managed strategy invests in global real estate firms with above-average income and long-term capital growth. Charging 59 basis points (bps), the ETF will hit its three-year milestone next year and may be one to watch. Co-managed by Steve Buller, who has over 25 years of experience investing in real estate, FPRO invests in firms like industrial real estate outfit Prologis (PLD) or shopping center real estate company Kimco Realty Corporation (KIM), and notably, has maintained a long-term underweight to the office sector.

Source: “Is the Commercial Real Estate Panic Overblown?“