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CRE Valuations Are Trending Down, Green Street Researchers Warn

“Value appreciation has practically stopped in aggregate,” said Joi Mar, senior analyst at Green Street, in a webinar on Wednesday.

Commercial real estate investors can expect that property prices will trend downward in the near future, according to Green Street Advisors, a real estate research firm headquartered in Newport Beach, Calif.

It’s a trend the industry is already starting to see. “Value appreciation has practically stopped in aggregate,” said Joi Mar, senior analyst at Green Street, in a webinar on Wednesday about the outlook for commercial property valuations. Green Street's Commercial Property Price Index dipped 1 percent in March and has seen little change over the past two years.

However, there are variations among sectors. Industrial—especially last-mile industrial—has seen rising values, and malls have seen big losses, she noted. Prices on industrial assets recorded an 11 percent gain year-over-year, but mall valuations have dropped by 15 percent during the same period, according to Green Street’s Commercial Property Price Index.

Two recent transactions in the mall sector—Brookfield Property Partners’ acquisition of General Growth Properties (GGP) and UnibailRodamco’s acquisition of Westfield Corp.—have dragged retail valuations down further, Mar said. While the Westfield deal suggested that mall cap rates were in the right ball park, the more recent GGP deal suggests that cap rates are 10 percent lower than thought, Mar noted. This caused Green Street to mark down its mall asset values by 5 percent on average.

Overall, industrial and mall values have drifted apart 25 percent over the past 12 months. “That’s pretty unprecedented,” Mar said.

Cap rates have been inching up over the past year for all sectors except industrial, according to Mar. The bid-ask spread has widened, investors in general have been more cautious and hesitant, operating fundamentals have softened a bit and there is a fear of rising interest rates. “All of this has created choppiness in the market,” Mar said. Transaction volume is also down, but Green Street believes the volume would be even lower if debt capital was not so widely available, the analyst noted.

Today, investors can expect returns of around 6 percent, on average, for assets in most core sectors and a little bit higher returns for niche sectors, said Andy McCulloch, managing director at Green Street, noting that the firm’s return forecasts focus on unlevered returns for long-term holds.

The property price indices of other firms reflect somewhat different findings.

Real Capital Analytics’s (RCA) CCPI shows that prices rose nationally in February by 0.5 percent from January. Year-over-year, RCA’s price index is up 8.1 percent. The monthly pricing index released by Ten-X Commercial, an online real estate marketplace, also found that prices rose from February to March by 0.5 percent, which marks the index’s second gain in a row. Year-over-year, the index is 0.7 percent higher.

RCA’s index shows that CBD office prices have risen by 1.7 percent year-over-year—the smallest annual increase among sectors. The growth leaders, according to RCA’s data, include apartment and industrial sectors, where prices rose 0.7 percent and 1.3 percent, respectively, from February to January.

Ten-X data shows that the industrial sector was the only of five that saw pricing drop—by 0.5 percent—from February to March.

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