Values Continue Climbing Past '07 Peak

NEWPORT BEACH, CA—The Green Street Commercial Property Price Index increased by 2% in November. Reflecting values for institutional-quality properties owned by REITs in the five major sectors, the index issued each month by locally based Green Street Advisors has gone up 10% over the past 12 months. Now standing at 115.4, it's slightly more than 15% above the August 2007 peak.

In the most recent US Capital Trends Report, issued about two weeks ago, Real Capital Analytics reported that cap rates declined between five and 10 basis points during the month of October across most property types. In the case of multifamily, for instance, RCA said they've declined to just under 6%, with garden-style apartments showing the steepest compression.

“Cap rates continue to move lower as investors search for return,” says Peter Rothemund, an analyst at Green Street Advisors. “And it would not be surprising to see further moves down. Against a backdrop of historically low government and corporate bond yields, today's real estate valuations look rather attractive.”

The most recent version of RCA's own equivalent to the Green Street index, the Moody's/RCA Commercial Property Price Index, has shown comparable upward movement in pricing along with downward movement in cap rates. During the third quarter, the CPPI's all-property national aggregate was up 2.2%, and has risen 13.5% over the past year. “CBD office continues to lead all property types in recent pricing appreciation, although the apartment and industrial sectors have experienced healthy year-over-year gains,” according to RCA.

For October, the most recent complete month for which RCA has compiled data, sales of significant commercial property totaled $37.6 billion, up 3% Y-O-Y. The most substantial volume gains in October were recorded in the retail sector, which saw $9.2 billion of sales, up 93% YOY.

As for cap rates, their ongoing decline and fall is being watched with concern. In its latest Global Capital Trends report, RCA notes that in the Americas and particularly the US, “Cap rates are testing historic lows, causing increasing speculation of a potential pricing bubble. To refute this, the argument is that that the spread between cap rates and interest rates remain very wide historically, a valid point.”

Also valid, RCA says, is the view that historic spreads may no longer be relevant “since interest rates are disconnected from traditional market forces” due to the Federal Reserve's intervention. “Real estate investors are speculating on central bank policy as much as on market fundamentals. This factor alone may be cause enough to justify the wide spread, or risk premium, in the current market.”