A Bifurcated Property Market
Property returns “improved” in Q2 of 2023 in the sense that quarterly returns were not as bad as in previous quarters. What was a -3.6% total quarterly return for the MSCI U.S. Quarterly Property Index in Q4 2022 improved to a -2.0% pace by Q1 2023 and -1.6% in Q2. This relative upturn in the headline figures though masks even stronger improvements seen for individual property sectors.
Capital values were shocked in 2022 as changes in asset pricing lead appraisal professionals to markdown asset values. These price declines were motivated in large part by increasing interest rates and an increase in the cost of debt. Property sectors that saw otherwise healthy income trends are simply in the process of adjusting to what might be a one-time shock to the financial aspects of investments.?
The industrial sector for instance delivered a total return of 0% in Q2 of 2023 after two quarters of negative returns. Capital growth for industrial properties did detract from industrial returns in the quarter with a -0.8% pace of capital growth. That decline though was an improvement from the previous two quarters and raises a question about how much more of a change is needed.
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By contrast, the office sector is not improving. Given that offices represent 22.1% of the MSCI U.S. Quarterly Property Index, that accelerating pace of decline for total returns is dragging down commercial property returns overall. Total quarterly returns for offices stood at -6.1% in Q2 of 2023, worse even than the -5.4% set in Q4 of 2022.
Unless there is significant distress, it is difficult to see the major changes in the pricing of deals that lead appraisal professionals to mark down asset values. So far, the biggest stories in distress have been in the office sector.
This article leverages data from MSCI at https://www.msci.com/ where subscribers can acces the underlying data. Any opinions expressed are mine and not those of MSCI and should not be construed as investment advice.
Director - Investment Sales
1 年Love the shot of St. Pete!
Director of U.S. Research, Yardi Matrix
1 年Jim, how much has office values dropped since turning negative (looks like four quarters ago)?
Real Estate Investor Relations Executive | Strategic Business Developer | Expert in Acquisitions & Valuation Underwriting | Driving Growth and Building Strong Financial Stakeholder Relationships
1 年Jim Costello, great insight and thank you for sharing. As we know, COVID Era changed the way we do business, not only here at home, but globally. CRE right now and the amount of debt coming due over the next few years, places an emphasis on the distress banks holding CRE debt maturing, will feel. The CRE mortgage holders are going to face a slew of challenges if they're able to refi. I certainly see a path to a more normalized return to the office, albeit, very slowly and doubtful we'll see attendance levels back in office to what they were prior to COVID. Many CRE owners will face the inability to rightsize financially, and face foreclosure on their assets(s). Time will tell how this will shape the CRE landscape.