Property pricing is unlikely to decline in 2019, Rothemund says. “Maybe it does in retail and that wouldn’t surprise me. Other than that, I don’t expect prices to decline. But, I don’t really expect them to go up that much either. Modest 2 percent price appreciation seems most likely, but there are probably a few sections that may do quite a bit better than that.”
U.S. economic growth, combined with a more supportive interest rate environment, bodes well for the country’s commercial property sector, which continues to be buoyed by robust transaction activity in the multifamily and industrial sectors.
“Stronger-than-expected first quarter economic activity has investors feeling a bit more confident today than perhaps they did three months ago,” notes Lauro Ferroni, director of research at commercial real estate services firm JLL.
In March, the U.S. National All-Property Index rose 5.8 percent from a year ago and 0.4 percent from February, according to RCA. The decrease in annual price growth comes as the pace of commercial real estate deal-making slows. Investment volume was down 11 percent in the first quarter of 2019 from a year earlier, according to RCA data.
The Green Street Commercial Property Price Index increased by 0.1 percent in March. The index has been stable recently, having increased by less than 1 percent over the past six months.
As the economy settles into a rhythm, an increase in transaction volume could be on the horizon, some commercial real estate experts say.
Broker Opinions of Value (BOV)—a leading indicator for transaction activity—have anecdotally picked up, according to brokers at real estate services firm Cushman & Wakefield. This suggests that transaction activity could rise in future quarters, says David Bitner, head of Americas capital markets research at Cushman & Wakefield.
“The economy continues to add jobs at a historically elevated rate, once again confounding expectations of a slowdown,” he notes. “We have a lot of observers thinking that we could have unemployment reach as low as 3.5 percent within the next year. Jobs are the most important fundamental for the property markets.”
Interest rate pressures on pricing, which rattled investors last year, also shouldn’t be an issue. The 10-year Treasury, which reached 3.26 percent last year before settling back down to about 2.5 percent, didn’t seem to have any negative impact on pricing, Bitner says. “Debt and equity spreads are much more favorable than they were three, four, five, six months ago and that is supportive to property pricing and should extend to transaction activity.”
When interest rates rose quickly in the fourth quarter and the stock market became volatile, real estate investors took a pause; they seemed to do the same when the interest rates fell in March. Now things are looking less volatile.