Property Valuations Predicted to Grow 15%

WASHINGTON, DC—Property valuations are expected to increase 5% over the next three years for a total of 15%, according to the RICS US Commercial Property Monitor for Q1-2015, which RICS is set to release Wednesday morning. That is the upper end of what might ordinarily be expected, as property values tend to grow in line with the economy, Simon Rubinsohn, RICS' chief economist tells GlobeSt.com.

There are concerns about the US economy, especially in recent months following a lackluster Q1 performance. However, "I don't spend a lot of time worrying about vagaries of GDP which can be revised and special factors can account for a particular quarter's performance," Rubinsohn says.

Indeed that seems to be the attitude of the survey respondents, whose outlook has actually improved since the previous quarter when respondents predicted that prices would increase by 3.7%. "There is a clear strengthening of expectations," he says. Hand-in-hand with that, he continues, some investors see pricing in some markets as becoming "a little to dear."

Prime retail valuations are expected to increase the most, at 6.2%, following by prime office valuations of 5.9%. Prime industrial real estate has been predicted by survey respondents to increase by 5.5%.

To be sure, this view is based in part on the widespread belief that the Federal Reserve will move very slowing on interest rates, Rubinsohn said. "If rates were to suddenly jump higher than expected, I think we would see a change in outlook." That is unlikely given the many signals the Fed has sent out about a slow and steady approach to interest rate increases. Also, fundamentals are favorable, with tenant demand continuing to outstrip available supply, Rubinsohn says.

Core cities such as New York, Chicago, Boston, Los Angeles, San Francisco and Washington DC are the chief targets by investors. But as pricing continues to escalate and cap rates remain compressed, investors are more interested in exploring secondary markets, according to Daniel Bizzoco, senior vice president for valuation at Avison Young in New York. They are heading to Dallas, Denver, Houston, Charlotte and Philadelphia, and other cities looking for value-added deals offering more attractive yields, he said. "At the end of the day, significant capital is chasing too few opportunities, driving up prices in many markets."

Respondents to the RICS survey predict that prime retail valuations in secondary markets will increase on average about 4.2%, with office and industrial both clocking in at a 4% increase.

New York, however, appears to be immune to investors' usual aversion to high-priced real estate. Even though two-thirds of the respondents view New York City as expensive, capital continues to pour in, both from domestic and international sources.

"Manhattan has witnessed such a big price boost due to all the influx of capital that activity has been spilling over into Brooklyn and Queens, which are on fire," Bizzoco said. "The demand in New York remains high for all commercial sectors, plus multifamily and condos. And pricing for land in Manhattan seems to be reaching new heights every day."