• There is an all-time high in commercial property prices, according to Green Street Advisors. The price index in July was unchanged from the record-high set in June. It is up 6.0 percent from one year ago and up a whopping 76 percent from the cyclical low five years ago.
• For those who took the plunge to buy during the scary times in 2009, the returns on their investments have been quite spectacular. Warren Buffet’s adage – “buy when others are fearful and sell when others are greedy” – appears right-on regarding recent cycle of commercial real estate. But given the likely rising interest rate environment, the opportunities for further price gains could be limited. That is, there will be less chasing of yields and chasing after commercial real estate if alternative investments like the U.S. Treasury offer higher interest rates.
• This Green Street Advisors index is should be taken with a grain of salt. First, it captures the information of contracts and appraisal data, and not the final transacted prices. Second, it only tracks properties that are very expensive in cities like New York and San Francisco. It misses out on commercial property prices of local bakeries in Indianapolis or warehouse building across the railroad tracks in Chattanooga, for example.
• Another index from the Federal Reserve shows recovering prices but not at record highs.
• Commercial REALTOR® members are active in all markets and have indicated that commercial property prices have only turned positive in the past year. The prices are nowhere near record highs. This also means there could be a reallocation of investment money away from Green Street-type properties to smaller-sized commercial buildings in mid-sized cities.
By: Lawrence Yun, Ph.D (Economists’ Outlook)
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