US commercial property prices fall, 'worst yet to come'

Washington

US COMMERCIAL real estate prices are falling as the economic toll of the Covid-19 pandemic worsens - and the decline is just getting started.

Indexes for office, retail and lodging properties all slipped year-over-year in July, data from industry tracker Real Capital Analytics showed.

Transaction volume plummeted to US$14 billion across all sectors, down 69 per cent from July 2019.

"The worst is yet to come," Real Capital's senior vice-president Jim Costello said. "We are not seeing the fallout yet of owners selling properties and taking a loss."

Commercial real estate deals have been in a deep freeze as lenders give borrowers slack to defer payments and landlords are reluctant to drop asking prices.

That may change in the next few months as debts mount and the outlook dims for retail, hotel, office and even apartment properties that already suffered from oversupply before the pandemic hammered the US economy. "I would not be surprised if we start to see some of it start to break in September or October," Mr Costello said.

Hotel prices dropped 4.4 per cent in the year till July, while retail declined 2.8 per cent and offices fell 0.9 per cent, said Real Capital.

Apartment building prices climbed 6.9 per cent, and industrial values rose 8.3 per cent, leading to a 1.5 per cent gain for all property types in the period. On a monthly basis, industrial prices jumped 0.9 per cent from June, while apartments gained

0.2 per cent and other sectors fell.

The last time office prices slipped year-over-year before the pandemic was January 2011. In central business districts of cities such as New York, San Francisco and Boston, prices started recovering from the 2008 financial crisis in the fourth quarter of 2010.

Multi-family prices are starting to diverge as suburban garden apartments lure residents from urban core buildings that faced pricing pressure even before Covid-19.

Family-forming millennials will drive the shift away from expensive, densely-populated cities long after the pandemic's impact fades, so property values in the suburbs are likely to rebound faster, Mr Costello said. "The last downturn, suburbs were the laggard. This one will be different." BLOOMBERG