NEW YORK CITY—Commercial property values are likely to continuetrending upward as the five major food groups continue shiftingfrom recovery to expansion mode. That's the key takeaway fromIntegra Realty Resources' "Mid-Year Viewpoint2014," a series of reports on both the national perspective and 66local markets.

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Thus far in 2014, industrial has experienced the strongestimproved prospects of any property sector, according to IRR.Nationally, 97% of industrial markets are now reported to be in therecovery or expansion phase of the real estate market cycle, while51% are observed to be in an expansionary cycle. That's up sharplyfrom 22% in this phase just six months earlier.

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Enjoying a run similar to that of industrial, nearly 94% of allurban multifamily properties are in the expansion phase of themarket cycle, and IRR predicts that this situation should continuenationally for at least the balance of 2014. That being said, thenational report notes that the lowest cap rates achieved thus farthis year have been in suburban multifamily, where they've gone aslow as 3.7%. However, their urban counterparts still achieved thehighest average at 5.6%, due to a smaller fluctuation between highand low caps.

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Regionally, multifamily cap rate contraction was material in theCentral States and the South regions, while notably flat in theEast and West. IRR says some secondary markets such as Cleveland,Minneapolis, and Phoenix, reported material decreases in cap ratesof 50 basis points or more over the past six months. However, onbalance cap rates have changed little across the major propertysectors since January, except to continue declining.

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Among the major sectors, office recovery has been the mostgradual, according to IRR. Less than one quarter of suburban officeproperties, for example, are considered to be in the expansionphase of the market cycle.

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Average cap rate contraction was most muted in the office sectorregardless of region, suggesting that stagnant job growth is havingan impact on investment demand within the sector. On the otherhand, year-to-date value appreciation in many markets, combinedwith gains from the previous two years, has largely erased lossesfrom the 2008-2010 recession. Only in five smaller marketsnationally—Greensboro, NC; Hartford, CT; Jackson, MS; Sacramento;and Wilmington, DE—have CBD office assets failed to appreciate orat least maintain their value over the past three years.

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“IRR forecasts that on average, all major real estate sectorsshould increase in value over the coming 12-month period,” thereport states. “Expectations for value appreciation are especiallyacute with respect to suburban multifamily product, while they aremore muted for both CBD and suburban office product.”

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In terms of value appreciation expectations, flex industrial andneighborhood retail product have seen the sharpest fluctuations,“perhaps indicating that investors are broadening their reach withrespect to the subtypes of assets—in search of stronger potentialyields. Because the real estate sector continues to attract newinvestment capital while its property fundamentals remain strong inthe face of macroeconomic headwinds, IRR is overall very bullish interms of near-term valuation appreciation trends.”

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.