The impact of higher interest rates is beginning to take its toll on commercial real estate prices. Commercial property prices have fallen nearly 13 percent so far this year, according to Green Street’s Commercial Property Price Index in October. The Index reports that commercial real estate prices were down 7.3 percent alone in October.
The index peaked in April 2022 after clawing its way back from the pandemic-induced recession in 2020, but it has been falling ever since. All types of commercial real estate asset prices are down, but some are doing better than others. Shopping mall prices have been hit the hardest, down 23 percent, while industrial has been the second-worst performing asset type, dropping 17 percent so far this year. Hospitality and self-storage are the best-performing asset types price-wise, but they are also down six percent.
Green Street says it’s no mystery what’s causing the price declines: rising interest rates. The Federal Reserve recently hiked the key federal funds rate by 75 basis points, the sixth rate increase so far in 2022, to between 3.75 and 4 percent. Fed Chairman Jerome Powell said the central bank’s efforts to tame inflation via higher rates likely isn’t over yet. As long as the 10-year Treasury note stays above 4 percent, Green Street says commercial property prices will probably keep falling. Many expect another 0.75 percent rate hike in December and two additional increases of 0.5 percent each in early 2023. The impact of the higher rates on commercial real estate prices will be felt for the foreseeable future.