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on market for properties listed for sale fell 4.3% in the 12 months ending in October 2014, and the share of properties withdrawn from the market by discouraged sellers continued to recede, falling to 35.3%.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.