CRE Prices Rise Again, Led by CBD Offices

Property prices increased 70 basis points in July and major-market prices now exceed their pre-crisis peak by nearly 30 percent, reported Moody’s Investors Service and Real Capital Analytics, New York. 

Core commercial property prices rose 60 basis points during the month while apartment property prices, which make up a smaller component of the calculation, rose 100 basis points.  

Central business district offices experienced the most growth over the last three months, with prices increasing nearly seven percent, Moody’s reported. “Office has been performing very well for quite a while,” said JLL Executive Managing Director Tom Fish, a member of the Mortgage Bankers Association’s Commercial Board of Governors. “As job growth across the country continues to grow, it’s no surprise that office, especially CBD office, is now enjoying very healthy growth rates.”  

Apartments saw the second-highest price growth over the last three months–up three percent–and prices now exceed their prior peak by more than 30 percent, Moody’s reported. “Apartment prices exceed the pre-crisis peak for two main reasons,” Fish said. “First, rents are higher and second, costs to build them are higher.”  

Fish said strong multifamily demographics suggest continued upside in this sector “as long as we continue to see sustained growth in the overall economy.”  

Moody’s said the only two core commercial segments that have not yet fully recovered their post-crisis losses are retail and suburban office, down about 6 percent and 10 percent respectively from their peaks. Major-market prices now exceed their pre-crisis peak by nearly 30 percent, Moody’s said. Non-major market prices fall just one percent shy of their pre-crisis peak. 

“The four most important rules in commercial real estate are location, location, location and timing,” Moody’s said. “The best five-year period since 2000 saw a gain of more than 80 percent while the weakest five-year period saw a decline of about 25 percent.” 

Looking at data for the second quarter, CoStar, Washington, D.C., said its value-weighted price index, which reflects sales of high-quality commercial assets in core markets, rose 2.1 percent between April and June while its equal-weighted index, which weighs each sale transaction equally to capture more numerous small deals, increased 2.4 percent.