Property Prices, Transaction Volume Slide as Demand for Space Plummets

U.S. commercial property prices declined in February as tenant demand across all property types approaches lows last seen during the Great Recession, with millions of square feet of space given up around the country.

CoStar Group’s value-weighted U.S. composite index, reflecting big property sales common in major cities, fell for the sixth straight month, sinking 1.4% from January. Prices are down 10.6% over the past 12 months.

Meanwhile, the equal-weighted U.S. composite index, showing the more numerous, lower-priced property deals typical in small markets, dropped 1.3%. This reversed a 1.9% monthly gain.

The findings, gathered from the most recent available pricing data, are part of CoStar’s Commercial Repeat-Sale Indices that track when a previously sold property trades hands again in a process called a repeat sale. The CCRSI is based on 803 repeat-sale pairs in February and 302,949 repeat sales since 1996.

Pricing is affected by higher Treasury rates that have largely remained above 4% since the beginning of the year, according to Chad Littell, national director of U.S. capital markets analytics for CoStar and author of the CCRSI report. The higher cost of capital is also dragging down deal volume.

The number of transactions in February marked the second-lowest total since May 2020, two months after the declaration of the pandemic. Repeat sales totaling $5.2 billion were traded in February, a 13.3% drop compared to the prior month.

The sluggish sales come as demand for space has plummeted, Littell noted.

Tenants are expected to lease less commercial space than they vacated for negative net absorption for the 12 months ended in March, Littell said.

“While the negative absorption was uneven during the pandemic,” Littell said, “the current environment more closely resembles the Great Recession’s comparable distribution of occupancy losses,” referring to the downturn that began in December 2007 and ended in June 2009.

Negative net absorption across all commercial property types totaled 59 million square feet.

While demand is slowing, so too is the completion of newly constructed office, retail and industrial space. Completions are projected to reach 843.9 million square feet in the 12 months ended in March, down 1.2% from the year through March 2023.