Wednesday, March 9, 2016

Inflection Point in the Commercial Real Estate Market?

With cap rates at all-time lows, capital pouring into the asset class, occupancy rates sky high, and the economy kicking into high gear, most commercial real estate professionals know things can't get much better. In fact, I'd say there's a lingering feeling in the industry that things can only get worse. That mentality is certainly a good thing--it means people are actually thinking of the downside and (hopefully) exercising more caution than in, say, 2006, but it if you believe in collective wisdom it might also signal an upcoming slowdown in commercial real estate markets. Along those lines, an article from Bloomberg with some stats from Moody's has an ominous warning:

U.S. commercial real estate prices dropped in January for the first time since 2010, a sign of weakening demand by investors after a six-year rally that pushed values to records.

The Moody/RCA Commercial Property Price Index slipped 0.3 percent from December, Moody’s Investors Service said in a statement Monday. The decline was led by office and industrial buildings, which each had a price drop of more than 1 percent.

“This is a significant milestone that signals that a shift in sentiment among commercial-property investors is under way,” Moody’s said in the statement.

Volatility in financial markets may be hurting real estate demand. Rates of return are falling and it’s “very difficult” to bundle and sell real estate loans, hindering debt financing for transactions, Jon Gray, head of real estate for Blackstone Group LP, said at a conference last week. His company is the largest private equity property investor, with about $94 billion under management in real estate.

The Moody’s index has almost doubled since its January 2010 trough and is about 17 percent higher than its previous peak, as low interest rates and rebounding economic growth fueled property demand. Prices have jumped the most for office buildings in top cities such as New York and San Francisco, more than tripling since the market’s bottom.

Normally I'd say one poor indicator is nothing to get too concerned over, but a slowdown in prices occurring for the first time in 6 years (...6 years!) certainly seems like a potential inflection point. Bumpy times ahead?

1 comment:

  1. According to the Moody's/RCA Commercial Property Price Index, or CPPI, commercial property prices dropped 0.2% in February. However, they remain 16.2% higher than their previous peaks reached before the recession. They're also 94% greater than they were during the market's bottom in 2010. Commercial Real Estate Greenville NC