With economy in flux, prices recalibrating in commercial property market

The growth of commercial property sales continued to slow in May as the market regressed from a record first quarter, according to MSCI Real Assets.

MSCI’s most recent U.S. capital trends report revealed that total commercial real estate transaction volume was up 3% for the month, receding from the double-digit growth posted during the first three months of this year. Headwinds such as rising mortgage rates and widespread inflation have given pause to investors, while sellers thus far have been slow in adjusting their price expectations, leading to a more modest flow of transactions.

Across the major commercial asset classes, annualized deal-volume growth was both up and down. Apartments continue to show resilience, with multifamily transaction volume up 22% year over year. Retail, which has shown some promise of late, was up 34% year over year, while hotels continue to bounce back in 2022 with an annualized deal-volume increase of 36% in May to lead all property sectors.

In response to current pressures, lenders and investors alike are finding it necessary to reevaluate pricing structures in real time, with lenders no longer supporting valuations from earlier in the year. Commercial loan-to-value (LTV) ratios in April averaged 56.7%, a drop of nearly 50 basis points (bps) from March. For multifamily deals, LTVs averaged 60.5%, tumbling more than 100 bps in the same time frame.

In turn, price growth has started to decelerate, albeit slowly, as recalibration takes time. In May, the commercial property price index maintained by MSCI was up 18.6% year over year, down from the rate of 19.3% reached in January.


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