Commercial property values may soon be on the rebound with data indicating early signs of recovery following last year’s bruising price correction – but not for all real estate asset classes.
Earlier this week, MSCI’s monthly commercial property index revealed that values had nudged up 0.27 per cent in March, the first increase since June last year. The data analysis firm said the fraction of a percentage rise was led by “an increase in values for residential, industrial and retail property”, but it added that office values were still falling as the asset class “comes under pressure from hybrid working trends and heightened risk of obsolescence”.
MSCI said that capital values fell much faster during this most recent downturn than in 2008 or the late 80s – something which several experts have pinned on a change in valuation methods. It added that the result of this has been a much shorter downturn this time around “as it stands”.
The new data echoed numbers from real estate giant CBRE (US:CBRE) earlier this month. The agency recorded a 0.6 per cent increase in overall commercial real estate values for March, which it also noted was the first increase since last June.
This positive overall figure was also driven by industrial and retail valuation rises of 1.3 per cent and 1.1 per cent respectively. However, as with MSCI, CBRE recorded negative numbers for office assets. They fell a further 0.3 per cent in value in March – the ninth consecutive monthly value drop. Central London and outer London office values specifically dropped by 0.4 per cent and 0.5 per cent respectively.
"Despite the economic challenges that continue to swirl the market, the correction appears to have largely run its course thanks to more certainty around the path of interest rates," said the chief executive of real estate consultancy Lambert Smith Hampton, Ezra Nahome.
Company updates from warehouse developer Segro (SGRO) and generalist real estate investment trust Picton (PCTN) last week echoed the beginnings of an industrial rebound. Segro and Picton posted valuation drops of 2 per cent and 1.2 per cent respectively for the first quarter of this year after much heftier valuation drops – of 16.6 per cent and 9 per cent respectively – in the second half of last year.
Segro said the data from both the market and its own portfolio was a sign of “stabilisation in asset values”. Picton also said both its and market data “reflects stabilisation” following the marked repricing after the September 2022 mini-Budget.
The longer-term future for office valuations remains uncertain. Investment data from Lambert Smith Hampton showed investor sentiment around offices “remains cautious [...] at 43 per cent below the five-year quarterly average, despite some big ticket deals”.
Meanwhile, the consultancy said that retail assets were trading at just 8 per cent below the five-year quarterly average.
Despite the reasons for optimism, overall commercial real estate transaction volumes remains depressed. The worst may be over for commercial property, but the storm has not passed just yet.
