The growth in real estate sale prices dipped to single digits across most property types in 2019, in a sign of a wider slowdown across the industry, according to new data from CoStar. It’s a contrast from 2018, when the same sectors saw double-digit gains.
Multifamily property sale prices led the way with an 8.8% increase over the previous year. Industrial price growth dropped sharply while retail sales, weighed down by rampant store closings, didn’t show any gain.
This month’s CoStar Commercial Repeat Sale Indices provide the market’s first look at commercial real estate pricing trends through December. Based on 1,522 repeat sale pairs that month and more than 221,567 repeat sales since 1996, the CCRSI offers a broad measure of actual pricing trends across property types and geographic regions.
When a property is sold more than once, a sales pair is created. The price change from the first and second sales are then used to calculate price movement, and all of the sales pairs are used to create a price index.
The gains, though smaller, were supported by several positive trends, according to CoStar analysts. Most major property types saw speculative construction keep pace with demand, and sales benefited from rising rental rates fueled by a continuation of the longest U.S. economic expansion on record. Meanwhile, interest rates for benchmarks such as the 10-year Treasury yield remained low, a positive underlying trend for capitalization rates, the key measure of returns for the industry.
CoStar’s U.S. Multifamily Index was the top performer among the four major property types, which also include industrial, office and retail. Despite high levels of new construction at the top of the market and already-lofty pricing, the multifamily index posted a gain of 8.8%. However, the results were a deceleration of the double-digit growth rate the sector had maintained since 2011.
CoStar breaks out separate “prime markets” indices within each property sector. They are dominated by major coastal metropolitan areas.
The Prime Multifamily Metros Index increased 5.6%, a slower rate than the broader market. This suggests that buyers are growing more cautious about high-value properties in mostly large cities, according to CoStar analysts.
One of the surprises in the indices was industrial property pricing. The U.S. Industrial Index advanced 2.3%, below the double-digit annual pace set in 2016 through 2018. While some slowing in momentum was expected, the sudden sharp fallback was more abrupt given the relative strength of demand, according to CoStar analysts. Vacancies held below 5%, and rent growth bested the other major property types. Pricing in the Prime Industrial Metros Index grew at a brisk 6.7% rate.
The U.S. Office Index turned in a solid performance, advancing 3.4%. This reflects continued, albeit modest, improvement in office rent levels and occupancy rates nationally. Price growth in core markets proved even more resilient, with the Prime Office Metros Index up by a stronger 9.3%.
Retail prices were flat, but it could have been worse. The U.S. Retail Index sustained first-quarter declines in 2019 but rebounded with modest growth in the fourth quarter. The net result was no percentage change on an annual basis. It was the weakest performance of the four major property type indices.
High-quality, well-located retail properties continue to command investor interest and pricing growth. But for other retail properties, pricing is regressing, particularly in centers with higher vacancy rates, according to CoStar analysts. Still, even in core markets, poorly located retail is suffering. The Prime Retail Metros Index declined 2.1%.
Separately, the U.S. Hospitality Index growth rate remained a bright spot. It was up 0.7% in the fourth quarter, contributing to annual gains in sale prices of 6.8%.
National hotel occupancies remain near record-high levels, and revenue per available room growth continued. The U.S. Hospitality Index ended 2019 more than 20% above its prerecession peak.