Monday, November 17, 2014

Commercial real estate is on fire



According to the Co-Star Group, the commercial real estate market is doing extremely well. As the chart above shows, a value-weighted measure of commercial property price indices has risen at a 10% annualized pace for the five years ended September 2014, and prices now exceed their pre-recession high. An equal-weighted measure is up over 14% in the past year.

Here are some of the headlines:

COMMERCIAL REAL ESTATE PRICE SURGE CONTINUES IN THIRD QUARTER

Both the value-weighted and the equal-weighted U.S. Composite Indices of the CCRSI made strong gains in September 2014 to close the quarter. The value-weighted index, which is heavily influenced by core transactions, advanced by 1.9% in the month of September and 3.3% in the third quarter of 2014. The value-weighted index is now 2.8% above its prerecession high and continues to make solid gains. The equal-weighted U.S. Composite Index, which is heavily influenced by smaller non-core deals, increased by 1.3% in September and 4.2% in the third quarter of 2014.

PROPERTY SALES ACTIVITY EXPANDING QUICKLY.

ANNUAL PRICE GAINS REALIZED ACROSS ALL MAJOR PROPERTY SECTORS.

RETAIL PROPERTY SEES STRONGEST ANNUAL GAIN.

MULTIFAMILY INDEX PASSES PREVIOUS PEAK.

We may be in a sluggish recovery, but that does not mean that everything is sluggish. I note that since September 2009, the total return of the Vanguard REIT (VNQ) is an annualized 18.7%, almost two percentage points per year better than the annualized 16.8% total return of the S&P 500 index.

11 comments:

William said...

It's just another asset class inflated by unbelievably low interest rates. A couple weeks ago I wrote of the sky high, record setting prices of fine art at major auctions and of collectable cars like Ferraris.

It's looking more and more like the Central Banks once again are creating bubbles - perhaps in the stock markets too.

As you have pointed out several times, there are trillions of dollars in money market funds, in bank deposit accounts, on corporate balance sheets, etc. And there are more trillions invested in various (not just US) government short term bonds around the world earning negative real yields.

What does it all mean?? Seriously! I would love to know.

Record breaking prices in many asset classes and still trillions of dollars on the sidelines as it were readily available to invest - or play the "greater fool" game.

It seems hard to fathom why prices should be so high with such poor global growth. Maybe the global top 1 - 2% ("the richer than god class") are responsible for the rise of a few of the smaller asset classes. But what else is going on?

Benjamin Cole said...

William---
I like prosperity and record prices.
Interest rates will be low for many many years, perhaps decades. Get used to it.

Central banks have been in the inflation-fighting tight-money mode since the 1980s. This is the result.

Gushers of capital and no inflation.

Matthew Grech said...

Scott: In your opinion, what's the best way to play this strength in commercial real estate?

Scott Grannis said...

I see two ways to benefit from a relatively strong real estate market.

For one, real estate is a classic hedge against inflation. If the Fed should fail to raise short-term interest rates and/or fail to withdraw excess bank reserves in a timely fashion, inflation could rise by more than the market currently expects. That would result in faster growth in incomes, nominal GDP, and possibly real GDP, and it would likely result in higher prices for both residential and commercial real estate. Currently, real estate prices are still considerably lower, in many cases, than they were at the peak in 2006, especially in real terms. Thus, real estate is not a very expensive hedge against inflation whereas gold and TIPS still appear to be expensive.

Second, commercial real estate could benefit from rising inflation via rising rental income.

Third, real estate investment trusts not only offer the prospect of participating in rising real estate values, but also pay dividends which are generally higher than those of most equities, and which could rise over time as inflation rises.

A popular, generic, and low-cost vehicle you might consider is Vanguard's REIT (VNQ). But there are many to choose from.

The downside risks to REITs, of course, involve anything which threatens the health of the economy and/or puts downward pressure on incomes and prices.

Matthew Grech said...

Thanks, Scott. Keep up the excellent (and very enjoyable to read) work.

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Lewis Remington said...

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Randy Jones said...
This comment has been removed by the author.
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