Commercial-property prices post solid gains

Sales prices of large commercial properties are on the upswing again.

The Moody’s/Real Capital Analytics (RCA) all-property index rose 8.2 percent year over year in August and was up 1.1 percent over the July level. The index measures price movements in commercial and multifamily properties sold for more than $2.5 million.

When all assets are considered, commercial prices have reached a peak. This has been driven largely by the apartment sector, where prices are running 48 percent higher than their levels during the last peak period in 2007, said RCA Senior Vice President Jim Costello. Suburban and central business district (CBD) office properties are still under peak price levels, however.

The apartment index recorded an annual gain of 14.3 percent through mid-August. The core commercial index, which includes retail, office and industrial assets only, was up 5.7 percent year over year.

Of the asset types, office prices saw the biggest bounce. CBD office properties have risen nearly 8 percent in the three-month period between mid-May and mid-August, Moody’s reported. CBD office prices reached a peak in late 2015 before falling back this year. In August, the index charting the prices of CBD office assets remained 1.5 percent below the 2015 peak.

Prices, when all property types are considered, are rising faster in major markets (up 9.4 percent annually in August) than in non-major markets (up 7.1 percent), Moody’s reported. Major gateway markets include New York, Chicago, Los Angeles, San Francisco and Washington, D.C.

“CBD office properties were really where a lot of the pain was felt, and part of the issue was the challenges to financing at that time,” Costello told Scotsman Guide News. “Into the end of 2015, the [commercial mortgage-backed securities] CMBS market caught a cold because corporate bond investors, the class of investors that ultimately buy the CMBS securities, they were getting pretty hesitant. They weren’t sure where they wanted to be.”

Costello said investors have since become more comfortable with the low cap-rate environment, and prices are rising again solidly. Although CMBS loan originations remain down, banks have picked up most of the slack.

“The market just took a bit of a breather while people figured out what they were going to do,” Costello said. Costello said he expects prices to continue climbing, although the market likely won’t see the double-digit gains of the past two years.

Prices tend to rise when capitalization rates fall. “Are we going to get ongoing cap-rate compression like we saw in the last five years?” Costello said. “Not too many people expect that. We are at record-low levels right now, and interest rates are at record-low levels.”

Costello also said the market faces few immediate threats of a downturn, even if the Federal Reserve decides to raise short-term interest rates.

“I don’t think it is going to do an awful lot,” Costello said.

Victor Whitman, Scotsman Guide

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