NEWPORT BEACH, CA—Despite nervous chatter about bubbles and another potential recession, commercial real estate values look quite reasonable compared to other investment alternatives, Green Street Advisors' analyst Peter Rothemund tells Globest.com. After the firm's latest research report revealed that commercial property values nationwide rose 5% in June, we spoke exclusively with Rothemund about the major drivers impacting CRE valuations currently and why he refutes the frothiness of the market.
GlobeSt.com: What are the major drivers impacting CRE valuations right now?
Rothemund: The number-one force is low interest rates. I believe investors are looking at what they can invest in and saying, “Well, commercial properties have a yield of say 6%, and what are long-term bonds yielding? Pretty low.” The long-term 30-year treasury is around 3%, and longer-term corporate bonds are around 5%. I feel that's been the big driver of property values over the last several years. If interest rates had continued to decline, property values would go up and it would continue to be a low-return world.
GlobeSt.com: Your firm's property-values report for June says price climbs should be experiencing a slowdown in the coming months. Do you anticipate a price decline occurring any time in the foreseeable future?
Rothemund: With property valuations now only fair when compared to the fixed-income market (they had looked consistently cheap for the past several years), the most-likely scenario is that capitalization rates will hold around current levels and property appreciation will slow from the pace of the past few years. Price declines do not seem likely at this point.
GlobeSt.com: Do you feel that valuations are getting frothy to the point of danger in some markets?
Rothemund: I can't speak to individual markets, but in general, no, I don't think valuations are at all frothy. Compared to other investment alternatives, valuations look reasonable. They don't look cheap anymore—that's the change over the past six months—but they also don't look expensive.
GlobeSt.com: What else should our readers know about valuations at this point?
Rothemund: Cap rates should settle in where they are, and maybe property prices will drift a little higher.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more inforrmation visit Asset & Logo Licensing.