Thursday, December 18, 2014

Commercial real estate boom continues

U.S. housing starts have almost doubled in the past 5 years, and according to Case Shiller, housing prices have recovered a bit more than half of their recession-era losses. But the recovery of the residential real estate market pales in comparison to the boom in commercial real estate, where prices have recovered substantially all of their recession-era losses and are rising at double-digit rates.


The chart above shows two measures of commercial real estate values as calculated by the folks at Co-Star Group. Their value-weighted measure of commercial property price indices has risen at a 10% annualized pace for the five years ended October 2014, and prices now exceed their pre-recession high. An equal-weighted measure is up over 14% in the past year. And these very positive trends continue. Here are some of the headlines:

Most major property types continued to benefit from minimal speculative construction, a firming economic recovery and rising rental rates.
The sale price-to- asking-price ratio narrowed by 2.5 percentage points in the 12-month period ended in October 2014 to 90.4% — the highest ratio since 2008. Meanwhile, the average time on market for properties listed for sale fell 4.3% in the 12 months ending in October 2014, and the share of properties withdrawn from the market by discouraged sellers continued to recede, falling to 35.3%.

We may be in a sluggish recovery, but that does not mean that everything is sluggish. I note that since October 2009, the total return of the Vanguard REIT (VNQ) is an annualized 19.5%, almost three percentage points per year better than the annualized 16.6% total return of the S&P 500 index. Year to date, the total return of VNQ exceeds that of the S&P 500 by over 15%. Wow.

14 comments:

Benjamin Cole said...

Institutional investors in commercial real estate have too much money to invest, I work this side from time to time. They are driving cap rates down on most quality properties. However prices have reached a level where further increases become suspect. As Bain & Co. pointed out, the world is flush with capital. Glutted. Interesting times ahead.

Capital, for the first time in history, is not scarce. This may be the new norm.
What does that mean for investors?

Benjamin Cole said...

Heavens to Murgatroy. The DJIA way up on Fed stance.

This economy is begging for more money....

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Austin Max said...

Institutional financial specialists in business land have an excess of cash to contribute, I work this side every once in a while. They are driving top rates down on most quality properties. However costs have come to a level where further expands get to be suspect. As Bain and Co. pointed out, the world is flush with capital. Glutted. Fascinating times ahead. properties for rent in the meadows

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Nicholas Taylor said...

It's better to imagine real estate gaining so many hundreds of thousands of pounds. That seems more real to most people than a 10% boom. But either way it shows a successful economy. As always, it is better to invest in commercial retail estate if you want a higher return, though residential retail estate shows an upswing too.

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