Commercial real estate (CRE) properties have exhibited impressive price appreciation as the longest economic expansion in U.S. history continues. This week’s chart highlights price changes for major property types in commercial real estate. Prices for U.S. CRE properties rose 7.8% in 2019. National CRE property prices have increased 24.6% and 46.5% over the past three and five years, respectively. Multifamily prices have been the strongest performer, up 34.2% and 65.4% over the same time frame. Price appreciation by property type has diverged to the widest level since the financial crisis. Retail properties reported the lowest one-year return of 3.8%, while industrial gained 12.1% in 2019. Office price appreciation has moderated, with a one-year return of 4.1%.
The industrial sector has been gaining momentum and was the only property type to report double-digits returns in 2019. Industrial space has benefited from the move to online shopping. Logistics has driven this sector, with a greater emphasis on last-mile properties closer to the end user. Not surprisingly, retail property prices have struggled in recent years as liquidity has been poor amid low transaction volumes. While negative headlines and store closures are a headwind for the retail sector due to the rise of e-commerce, this sector has benefited from a healthy U.S. consumer. In addition, the lack of new construction has helped keep prices stable. The office sector has been challenged by supply-and-demand imbalances in certain markets. Average office space per employee has been shrinking in recent years and landlords are struggling to keep up with the changing nature of office usage and teleworking, as shared office space has gained popularity. Multifamily properties have experienced the most stable price appreciation since the financial crisis. Limited housing supply and strong demand have kept vacancy rates low while driving rents up more quickly than any other major property type.
Low rates have helped propel commercial real estate prices during the past decade. The multifamily and industrial markets are leading the momentum as we begin a new decade. Demographic and social trends, employment conditions and reasonable new supply all combine to provide conditions that support steady rent growth and healthy occupancies. While some markets could be heading toward a pricing plateau, there is still strong global investor demand for real assets.
Over the long term, commercial real estate provides stable income-producing properties that earn a competitive yield. Investors are drawn to the stable cash flow, appreciation benefits and tax advantages of CRE relative to other asset classes. Commercial real estate investments can protect investor portfolios from volatility in the equity markets. CRE assets may also provide a hedge against higher inflation expectations.
Commercial real estate prices continue to post impressive price growth, which has been supported by low interest rates, strong real estate fundamentals, abundant capital and favorable supply-and-demand dynamics. Underwriting trends among major property types have remained stable, with no significant issues or deterioration in collateral performance expected in the near term. While the pace of forecasted price appreciation may be slowing, strong investor demand remains for high-quality assets in core markets.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
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