Office Properties Aren’t Joining Commercial Real Estate’s Valuation Bonanza

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With most of the commercial real estate market on a historically hot streak, the traditional darling of the industry is getting left behind.

Multifamily properties rose an average of 22.5% year-over-year in January, their ninth straight month of double-digit annual growth, according to the most recent update of Real Capital Analytics’ Commercial Property Price Index. Apartment buildings are worth an average of 136% more than they were at their pre-Great Financial Crisis peak.

Industrial real estate posted 28% year-over-year growth in January, pacing all commercial sectors, while even retail properties averaged 20.4% year-over-year growth, a record high for the sector, RCA reports. Year-over-year growth in retail had not even cracked 5% in any month from 2018 to the beginning of last year, making its current gains far more than simple recovery from the worst of the pandemic recession.

Office properties rose by 11.8% in value year-over-year in January, marking the fourth straight month of slowing growth for the sector, RCA reports. Whereas suburban office properties were quicker to start recovering from the worst of the pandemic, their values ​​have sputtered as urban core properties have picked up some of the slack.

Because of the long-term nature of traditional office leases, the effects of the pandemic on working patterns have been felt gradually since the summer of 2020, often corresponding with lease expirations leading to departures or space givebacks. In January, delinquency among CMBS loans tied to office properties ticked up to its highest level since June 2020.

Even though December saw record-shattering levels of activity in the commercial property capital markets, January did not see the markets catching their breath. Deal velocity in the month was higher than in January 2021, as unprecedented amounts of capital from both REITs and private equity sources compete with resurgent foreign investment for a relatively small number of available deals.