Commercial Real Estate's Relative Value Slips

Michael Tucker mtucker@mba.org

October 02, 2018


Commercial real estate's relative value compared to price slipped in the second quarter, reported Situs RERC, Houston.

Institutional investors surveyed by Situs RERC rated commercial real estate's value relative to market prices slightly lower in the second quarter than in the first, continuing a generally downward trend seen since late 2015.

Situs RERC asked institutional investors who represent pension funds, insurance companies, financial institutions and private equity firms if current commercial real estate prices are supported by current values. A 1 on the 10-point scale means price far exceeds value while a 10 means value far exceeds price. The CRE value vs. price rating declined slightly from 4.7 in the first quarter to 4.6 in the second, remaining below average.

"The below-average rating indicates that the overall commercial real estate market is over­priced relative to value," Situs RERC said. "Respondents have rated the commercial real estate market as overpriced since first quarter 2016, except for a brief spike in fourth quarter 2016."

Situs RERC said it considers the overall commercial real estate in equilibrium, with values and prices generally aligned. "However, this overall trend masks the fact that we are seeing client portfolio value vs. price as bifurcated--about half of all portfolio deals are coming in significantly underpriced and half are coming in significantly overpriced," the report said.

The firm cited a general lack of price discovery for keeping commercial real estate values and prices in equilibrium.

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