January was a bad month for commercial property prices, which fell “at an annual pace of decline not seen since late 2010 after the Global Financial Crisis,” according to an MSCI report. “The RCA CPPI National All-Property index dropped 4.8% from a year ago and 2.7% from December. The monthly decrease represents an annualized decline of 27.9%.”
There was only one property type index that saw positive annual growth in January: industrial, which was up 6.4% over the previous year. But month over month it was down 0.3%, which when annualized would be -3.2%.
Multifamily prices “tumbled” to the biggest percentage loss of any: 2.8% down from December and 4.6% off from the previous year. Retail fell by a relatively modest 0.9% from December and 0.1% from January 2022.
MSCI groups offices by suburban and central business district (CBD). The former saw price drops between December and January of 1.1% from December and 0.5% year over year. As for CBD properties, they saw an annual decline of 0.9% and no change between months.
“Prices in the 6 Major Metros recorded the sharpest rate of decline since June 2010, falling 6.9% YOY,” the report said. “The index has posted monthly declines for eight months in a row. The Non-Major Metro index dropped 2.0% from a year earlier and 1.8% from December.”
The report said that a spike in mortgage costs in 2022 undermined completion of deals, pushing pricing lower. When fewer parties are able to obtain financing, there is effectively less demand, so prices drop.
In addition, though, there are other forces at work, as GlobeSt.com has previously reported. One is the significant liquidity that was pumped into markets since the global financial crisis and then the increased amount in the fiscal and monetary responses to the pandemic. In the most favored property types, like industrial and multifamily, as investors looked for return when interest rates plummeted so low, prices rose dramatically and cap rates shrunk on the promise of ever increasing rents.
That has come to an end, as the rent jumps have diminished and, with higher financing costs, the lower cap rates are no longer sustainable. That has left the overall market perplexed as to what properties are rightly worth.
In other words, another big reason for the lack of transactions is uncertainty as to overall conditions, future interest rate hikes, inflation, and a possible recession. It will take some time for price discovery to happen and a greater amount of market stability to return.