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Biggest US Markets Saw Commercial Prices Slip, CoStar Data Shows

U.S. apartment pricing declined in the first quarter as deal volume fell.
After soaring prices and record-high transaction totals in the fourth quarter, real estate investors cut back on spending in the first few months of this year. The shift hit apartments hardest, the only sector in which property values slipped, new CoStar data shows.

The CoStar Commercial Repeat Sale Indices, which monitor price differences in sales of the same property to spot trends, show that the volume of those transactions tumbled 44.8% in the first quarter to $43.8 billion after an extraordinary surge of activity in the fourth quarter totaling $97.7 billion.
Among all property transactions, prices fell most notably in investment-grade deals of larger dollar amounts in major markets, as tabulated in the value-weighted U.S. composite index.
“After the blockbuster record-setting quarter at the end of 2021, transaction volume was expected to pull back in the first quarter,” Christine Cooper, chief U.S. economist for CoStar Group and lead author of the repeat-sales data report, told CoStar News. “But the scale of the drop-off was unprecedented. This was the largest quarter-over-quarter fall in the history of the series aside from the second quarter of 2020 as the pandemic took hold.”

The value-weighted index that reflects activity in the biggest markets moved 1.3% lower to 294, off from its revised fourth-quarter value of 298. This compares to the quarterly gain of 5.4% in the fourth quarter. The index, though, was still up 16.5% over the 12 months ended in March.

Meanwhile, prices fell 0.5% for the more numerous but lower-priced property sales typical of second- and third-tier markets as measured in the equal-weighted U.S. composite index. This compared to its gain of 5.4% in the fourth quarter. The index is up 14.6% in the 12 months ended in March.

The drop occurred because of the historic run-up in fourth-quarter commercial property sales volume, Cooper added. “Some froth came off the market as pricing broadly cooled — and even dipped into negative territory in the multifamily sector, which had experienced the fastest price appreciation over the past decade,” Cooper said.

Pricing faltered in the multifamily index after 12 consecutive quarters of gains. Prices fell 1% in the first pullback since the fourth quarter of 2018. Investment capital continued to move down the risk spectrum as larger-dollar multifamily deals in prime markets experienced the highest level of eroding prices. The prime multifamily metropolitan index fell 2%, its second consecutive month of decline.

Strong fundamentals in the industrial sector have drawn investors to this property type during the pandemic but slowing price appreciation that began in the second half of 2021 continued into 2022. Industrial prices cooled for the third consecutive quarter, edging up just 0.3%. That is the slowest quarterly gain since the fourth quarter of 2017. The retail sector’s challenges weighed on price growth in the first quarter as the U.S. retail index also rose just 0.3%, slowing for the third consecutive quarter, while office price growth stalled, posting neither a gain nor a decline. The negative, minimal and stalled pricing movements have come as the country deals with increased inflation, according to Cooper.

“The Fed’s well-advertised intentions to raise interest rates sharply over coming months are likely giving investors at least temporary pause as financial conditions tighten and costs of capital move higher,” she said.

One sector that bucked the overall slowing price growth trends was hotel properties. The hospitality index was the top performer, registering a 10.5% increase in the first quarter. The increase is a sign of the sector recovering from the effects of the pandemic.

The latest indices are based on 1,940 sale pairs in March and data collected on more than 268,000 repeat sales since 1996.

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