As interest rates shoot up and fears of a recession grow, the U.S. commercial real estate market is cooling following a two-year boom.
CRE prices nationwide fell 3.7 percent in June and by 4.9 percent since March — when property values hit an all-time high, according to an analysis by real estate research and advisory firm Green Street, which began tracking prices in 1998.
“The repricing that has occurred in bonds and stocks is finally evident in the commercial property market,” Peter Rothemund, co-head of strategic research at Green Street, said in a statement.
The dips came as the Federal Reserve raised interest rates by 0.75 percentage point last month, the largest increase since 1994, in bid to tamp down record inflation rates. The central bank is likely to continue raising rates in the coming months.
On the real estate front, strip shopping centers and warehouses took the biggest hits, dropping by 7 and 6 percent, respectively, between May and June.
The depreciation marks a sharp turnaround for industrial properties, whose values had jumped by 18 percent over the past year and by 42 percent since before the pandemic — the most for any asset class, except for self-storage properties. The industrial sector had become one of the hottest asset classes during the pandemic when consumers relied on online retail.
In contrast, indoor malls — which had struggled before COVID-19 hit with prices falling by 8 percent, second only to offices — are now experiencing an uptick in investor demand. The asset class fared the best, along with manufactured home parks, in the past month by not losing value.
Even before COVID-19 hit, offices took a hit, dropping 9 percent in value. As employees stayed home, the trend persisted over the past year with office building, falling by 1 percent — making it the only asset class to depreciate.
Julia Echikson can be reached at email@example.com.