Again The Fed Says CRE Valuations Are Inflated

The Federal Reserve Bank in Washington DC

WASHINGTON, DC–The Federal Reserve has said on a number of occasions that asset valuations, including in the commercial real estate sector, are inflated. It did it again on Friday in its Monetary Policy report  that it released to Congress. It wrote:

Valuation pressures continue to be elevated across a range of asset classes, including equities and commercial real estate. Over the second half of 2017, valuation pressures edged up from already elevated levels. In general, valuations are higher than would be expected based solely on the current level of longer-term Treasury yields.

This has been a theme that has appeared regularly in Fed speeches, reports and interviews. Shortly before she left, former Fed Chair Janet Yellen told CBS that US stocks and commercial real estate prices are elevated. Commercial real estate prices are currently “quite high relative to rents. Now, is that a bubble or is it too high? And there it’s very hard to tell. But it is a source of some concern that asset valuations are so high,” she said.

The Monetary Policy report follows last week’s release of the Federal Reserve’s minutes from its January meeting. Language from the minutes suggested the Fed would not be adverse to raising rates more than the expected three times this year. When it does valuations will likely reconfigure.

A Buyer-Seller Disconnect

It is also important to note that the Fed has signaled that the rate increases — however many there are — will happen gradually, which likely means that any influence on valuations will be subtle. In the meantime there are many effects that an inflated valuation of real estate assets can have on the market and the immediate impact has been a disconnect between buyers and sellers on pricing — a disconnect that has been underway for some time.