The dramatic increases in interest rates are starting to noticeably hit commercial property values. Green Street’s October 2022 price index reports the following national property value declines off recent peaks:
Shopping Malls -23%
Office Buildings -14%
For all commercial property types, the decline is 13% from a peak earlier this year. This is the largest decline since the 2008 financial crisis when prices dropped 35% according to Peter Rothemund, a researcher at the real estate analytics firm Green Street.
There is an obvious relationship with the cost of capital and property values. Sometimes, the price declines are mitigated by a compression in capitalization rates where buyers are willing to take lower returns. In this case, the very steep increases in loan rates are noticeably impacting values. The Federal Reserve’s 75-point bump was the fourth increase of that size.
In the South 2022 Tri this will become a bigger issue. Even early 2021 sales could reflect market conditions that are no longer attainable. We will be keeping an eye out for such potential overassessments.
This data was reported in Bloomberg on November 4, 2022, in an article by John Gittelsohn.