Commercial real estate prices have yet to exceed their pre-recession highs, but they are getting close, according to the repeat-sales indices of the Co-Star Group. As the chart above shows, Co-Star's value-weighted index of commercial property prices has been rising at about a 10% annualized rate for the past four years. That's a pretty impressive recovery in my book, even though prices in inflation-adjusted terms are still 12% lower than their 2007 highs. (The Value-Weighted Index is a more liquid, and thus more reliable and more responsive index, than the Equal-Weighted Index.)
The first thing I think about when looking at a chart like this is that it flies in the face of the Fed's ongoing concern about the health of the U.S. economy. Short-term interest rates shouldn't be at zero in an environment of double-digit price gains for the commercial real estate sector, since it invites excessive speculation.
For the time being, however, it looks like commercial real estate will continue to boom. As Calculated Risk notes, distress sales have been steadily declining for the past 3 years. As Co-Star notes, "in the early-recovery, coastal markets of Los Angeles, San Francisco and San Jose, distress levels are nearly non-existent."