Situs RERC: CRE Fully Priced
The relationship between commercial real estate value and price is shifting to a fully priced market, and in some cases, prices outpace the underlying valuation assumptions, reported Situs RERC, Houston.
“It is becoming more evident that commercial real estate is fully priced in most markets and that it is at another juncture in the investment cycle,” said Kenneth Riggs, president of Situs RERC.
Situs RERC surveyed institutional investors, who reported that the relative attractiveness of commercial real estate from value relative to price fell since the previous quarter, when value relative to price remained favorable. “As of third quarter 2015, value and price were equal,” Riggs said. “Commercial real estate is still a good investment but not as strong as an opportunity, given higher prices across the board.”
In its report, Another Juncture, Situs RERC said transaction volume increases and the pace of lending growth slowed in the third quarter–though both remain higher than year-ago trends–while the required pre-tax yield rates and cap rates are mixed. The report predicted that the pace of value and price increases will decelerate somewhat in 2016.
Riggs said the recent $5.3 billion sale of Stuyvesant Town and Peter Cooper Village in New York City to Blackstone Group and Ivanhoe Cambridge; sale of Equity Residential’s 23,000 apartment units for $5.3 billion to Starwood Capital; and the $12.2 billion sale of Starwood Hotels & Resorts Worldwide to Marriott International prove that capital flows have caused prices and deal sizes to reach a critical juncture.
“According to some investors, prices are outpacing the value of the properties they represent, and when comparing the high prices of commercial property in 2015, it is looking all too much like 2007 all over again,” Riggs said.
But some factors look different than before the 2008 credit crisis, Riggs noted. Banking regulations have been strengthened, credit requirements increased and central banks around the world show commitment to accommodative monetary policy that boosts economic conditions.
In addition, “underwriting standards have not gotten out of control, despite record low interest rates,” Riggs said. “Low interest rates are the primary driver that makes this investment period different and has allowed cap rates to compress to previously unheard of levels.” As a result, he said the spreads between Situs RERC’s third quarter required going-in cap rate and pre-tax discount rate averages for all property types versus the 10-year Treasury rates are 400 and 570 basis points, respectively. In fourth-quarter 2007, those spreads were 230 and 390 basis points, respectively.
