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Decline in Commercial Property Values and Leasing Activity Signifies a Cooling Market

The trend in U.S. commercial real estate has taken a downward turn in February, mirroring a retreat in tenant demand across various property sectors, reminiscent of the challenging times during the Great Recession. This trend has been characterized by a notable surrender of leased space nationwide.

The CoStar Group's value-weighted composite index, which represents substantial property transactions in major urban areas, experienced a decline for the sixth consecutive month, dropping by 1.4% from January and showing a 10.6% decrease year-over-year.

Conversely, the equal-weighted composite index, indicative of smaller, more common property transactions in less populated areas, also saw a decrease of 1.3%. This movement negates a previous increase of 1.9% and highlights broader market trends.

This analysis stems from the latest pricing data and is part of the CoStar Commercial Repeat-Sale Indices (CCRSI), which monitors the sales activity of properties over time. February's CCRSI was compiled from 803 repeat sales and has accumulated data from 302,949 repeat sales dating back to 1996.

Market dynamics have been influenced by persistent high Treasury rates, remaining over 4% since the year's start, as per Chad Littell, CoStar’s national director for U.S. capital market analytics. This environment has exerted pressure on property pricing and transaction volumes.

Transaction activity in February was notably low, the second lowest since the early pandemic days of May 2020, with repeat sales totaling $5.2 billion in February, marking a 13.3% decline from January.

This reduced transaction momentum aligns with a stark decrease in space demand, as Littell pointed out.

There's an expected downturn in leased commercial space versus space vacated, resulting in negative net absorption across a 12-month span ending in March, according to Littell's observations.

He compares the present market condition to the occupancy loss distribution seen during the Great Recession, noting a cumulative negative net absorption of 59 million square feet across all commercial property sectors.

In line with the diminishing demand, the completion rate for new constructions in office, retail, and industrial spaces is also on a downturn. Projections show a total of 843.9 million square feet to be completed over the 12 months ending in March, a slight 1.2% decrease from the previous year.


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