Inflation, rising interest rates, and recession fears have officially begun taking a toll on commercial real estate. Commercial property prices dropped 3.7 percent between May and June, according to a recent Green Street Commercial Property Price Index in the second quarter of 2022. The total drop in commercial property prices from a high in March has been 4.9 percent.
Green Street’s index is a “time series of unleveraged U.S. commercial property values that captures prices at which commercial real estate transactions are currently being negotiated and contracted.” Prices during the second quarter of 2022 are still an overall increase of 10 percent over the last 12 months and up 9 percent since pre-pandemic times. But Green Street’s index made clear that the repricing happening in bonds and stocks is finally becoming evident in the commercial real estate market.
Peter Rothemund, co-head of strategic research at Green Street, said price discovery is still taking place, but economic uncertainty and interest rate volatility are challenging. “Prices of most properties are down 5 percent-plus from recent highs,” he said. “In a few sectors, pricing has held up better.”
Recent surveys show real estate executives’ confidence in prospects for the industry has declined rapidly in the last few months, so news of falling prices may reinforce the pessimism. But the property price decline shouldn’t be too much of a surprise. Multiple signs have pointed to a downward trend after such rapid price increases in the last two years.
