Reports Cite 'Plateau' in Commercial Real Estate Asset Prices

Michael Tucker mtucker@mba.org

July 13, 2018


Commercial real estate asset prices have "plateaued" and transaction volume has moderated as the real estate cycle matures, reported Green Street Advisors, Newport Beach, Calif., and CoStar, Washington, D.C.

Green Street said its Commercial Property Price Index was unchanged in June. The index, which tracks the five major property sectors, has plateaued over the past 18 months and remains near year-end 2016 levels.

"The net result for the major property sectors may be no change, but some property types have done quite well over the past year and a half," said Green Street Advisors Senior Analyst Peter Rothemund. "Values for industrial, manufactured home parks and student housing are all up by double-digit amounts over that period. Retail has seen prices decline about 10 percent. Price changes in other sectors have been relatively small."

CoStar reported its price indexes showed little change in May, calling the sales market "in equilibrium." The research firm's equal-weighted index, which reflects the more numerous but lower-priced property sales typically seen in secondary and tertiary markets, was essentially flat during the month. The value-weighted index, which tracks larger-asset sales common in core markets, increased 1.4 percent in May.

Transaction volume moderated, CoStar said. Composite pair volume declined 1.7 percent in the 12-month period ending in May to $133.9 billion. "The slowdown in property sales during the 12-month period ended in May was due to declines in the investment-grade segment of the market, the report said.

Jim Costello, Senior Vice President with Real Capital Analytics, New York, said global commercial real estate prices now stand 78 percent higher than the low point set in 2009. "The strongest period of growth over this period was from 2012 to 2015 when prices hit a 9.7 percent compound average growth rate," he said.

RCA's Global Cities report said price appreciation is slowing around the world and investors now struggle to find investment opportunities with the double-digit returns seen in the recent past. "As part of this struggle, investors are looking to growth opportunities as a solution," the report said. "Economic growth is great. All things being equal, one should do better holding an investment in a market that is experiencing strong economic growth. More job creation leads to higher incomes and growing demand for all sorts of commercial property. As demand grows, so will net operating income and, ultimately, property prices, so long as cap rates do not move against you."

Though interest rates have increased recently, they remain low relative to long-term trends, Costello noted. "Low interest rates and yield-hungry investors are helping to support currently high property prices," he said. "Still, without the tailwind of declining interest rates to boost property price growth, most markets will not be able to grow at a pace sufficient to drive the double-digit growth in property prices seen in this cycle."

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