IRVINE AND SILICON VALLEY, CALIF. – October 26, 2017 – Ten-X, the nation’s leading online real estate transaction marketplace, has released its latest Commercial Real Estate (CRE) Nowcast. The monthly pricing index, which combines Google Trends data, Ten-X Commercial’s proprietary transaction data, and investor surveys to indicate CRE pricing trends in real time, revealed that the commercial real estate sector continued its slump in October, with nationwide commercial pricing edging down by 0.2 percent — the sixth consecutive month of contraction for the index.
The slide bolsters the theory, analyzed recently in a special report prepared by Ten-X Commercial Research, that a sharp divergence in pricing expectations between buyers and sellers is weighing on the market. Other factors hindering the monthly pricing index include investor uncertainty about how much longer the current business cycle has to run, the expectation that interest rates are heading upward, and property fundamentals are increasingly turning negative.
Pricing across commercial real estate is just 3.1 percent higher than its year-ago level, the weakest reading since the Ten-X CRE Nowcast’s inception.
“With a sixth consecutive month of decline, the market’s malaise can safely be described as a legitimate trend,” said Ten-X Chief Economist Peter Muoio. “The Ten-X CRE Nowcast’s annual growth rate has again reached its lowest level since we conceived the index, falling well below the 3.4-percent annual growth recorded last month, which was the previous low. A gap has emerged between buyers and sellers on price, which only exacerbates the slump brought on by investor concern over the age of the business cycle, impending interest rate hikes, and slipping fundamentals.”
The apartment sector continued to weaken, posting a 0.9-percent decline – its fourth straight monthly drop after a strong run-up earlier this year. It is now just 4.8 percent higher than a year ago – the slowest annual growth of the current cycle. Pricing weakness, which was broad across regions, is driven by a robust supply pipeline that has outpaced demand. Strong demand for apartment units and the accompanying strong rent growth appears to have run its course as a trend, as anyone who was likely to switch from owning to renting has already done so. The Northeast led the monthly drop-off with a 2.6-percent fall. In New York City, new units are flooding the market and vacancies are up, which is having a contagion-like effect on regional pricing. The Ten-X Apartment Nowcast recorded declines in the West and Midwest as well, while the Southwest remained unchanged and the Southeast eked out a minor gain.
The Ten-X Hotel Nowcast has failed to pick a direction in recent months and despite occasional periods of growth, the sector’s trend is decidedly weak. Pricing in the segment is down 0.7 percent in the past month and up a meager 0.2 percent compared to a year ago. Despite the weakening of the dollar versus the euro, which makes travel to the U.S. more appealing to foreigners, room rate growth is markedly slowing. Competition from Airbnb and similar services, as well as a growing supply pipeline, continue to be headwinds for the sector and investors see the current cycle as being long in the tooth. Only the Northeast bucked the trend of pricing declines in October.
The Ten-X Industrial Nowcast fell 0.1 percent in October, demonstrating a surprising degree of pricing weakness as the segment has now recorded five declines in the past six months. The index is 0.4 percent lower than it was a year ago – the only segment to post a year-on-year decline – an especially puzzling development given the strong fundamentals the industrial sector continues to enjoy. Absorption is now being generated by both traditional drivers of demand, such as rising industrial production, trade, and new capital goods orders, as well as new demand drivers such as the growth of e-retail, a shift to cloud-based services and the growing trend of cannabis legalization.
Office pricing edged 0.1 percent higher in October, thanks in large part to meandering fundamentals, putting annual growth at a meager 4 percent. Northeast pricing was robust, but not enough to offset weakness across remaining regions.
The retail sector climbed 0.9 percent in October, its fifth consecutive monthly gain. The segment’s annual pricing growth has remained in the 5 to 7 percent range since the spring. This strength comes despite headlines that paint a picture of a sector under siege due to recession-level closings of brick-and-mortar stores, the rising market share of e-retail, and a rising preference among consumers to buy experiences over things. Only the Southeast posted a modest decline in October as pricing was positive across the country’s other regions.
“October data confirms that commercial real estate pricing trends are weakening significantly,” Muoio said. “Until fundamentals increase enough to justify the prices many sellers are still expecting, pricing and deal volume are likely to continue their downward trends.”
About the Ten-X CRE Nowcast
The Ten-X CRE Nowcast is a price index covering the entire U.S. commercial market, including individual price trends for each major market sector – office, multifamily, retail, industrial and hotel. It is based on data modeling developed by Google Chief Economist Hal Varian, who defines “nowcasting” as “contemporaneous forecasting” – the ability to predict what is happening as it occurs. Ten-X applies Varian’s theories by combining publicly available and anonymous Google Trends data with its own proprietary transactional data to create a model for accurately predicting current commercial real estate activity. This data is supplemented with “real human” input through the company’s partnership with Situs and their Real Estate Research Report (RERC).
Ten-X issues its CRE Nowcast monthly after combining transactional data, related online search activity indicating purchase intent and investor survey results. The company runs multiple versions of the Nowcast model and layers in additional variables every day to improve its accuracy in predicting pricing trends across CRE sectors in key U.S. markets. Future iterations will include regional, local and individual asset-based price indicators. By analyzing current market conditions as opposed to only historical data, Ten-X is able to provide more relevant and timely insight to real estate investors, economists and government entities alike.
Ten-X is the nation’s leading online real estate transaction marketplace and the parent to Auction.com, Ten-X Commercial and Ten-X Homes. To date, the company has sold 300,000+ residential and commercial properties totaling over $50 billion. Leveraging desktop and mobile technology, Ten-X allows people to safely and easily complete real estate transactions online. Ten-X is headquartered in Irvine and Silicon Valley, Calif., and has offices in key markets nationwide. Investors in the company include Thomas H. Lee Partners, L.P. CapitalG (formerly Google Capital) and Stone Point Capital. For more information, visit Ten-X.com.