Five years after the onset of the global financial crisis, bellwether pricing indices indicate that commercial property values appear to have reached—if not surpassed—the market peaks of 2007.
Commercial property values were up 1 percent percent in April, putting them above their 2007 high, according to data from Green Street Advisors’ Commercial Property Price Index (CPPI). The FTSE NAREIT PureProperty Index, which covers REIT-owned properties exclusively, tells a similar overall story: Unlevered property values of REIT-owned properties nationwide were almost exactly on par at the end of April with where they were when peaking in January 2007.
The price increase in April indicates that property values have fully recovered the ground that was lost during the last downturn. In the previous month, commercial property values were up 2 percent returning them back to their 2007 highs.
Jason Moore, an analyst with Green Street Advisors said commercial real estate values continue to benefit from low interest rates combined with modest economic growth.
“Lower rates, an overall drop in yields and real estate catching up to other capital markets has attributed to rising values,” Moore said.
Moore said it’s likely that the upward momentum in pricing will be sustained. Property values rose 7 percent during 2012, according to the CPPI.
Other commercial property indices, however, remain below 2007 highs. For example, according to the Moody’s/RCA Commercial Property Price Index (CPPI), as of February 2013 unlevered property prices were still 19.9 percent below the market peak. As of the first quarter of 2013, the appraisal-based NCREIF Property Index (NPI), showed that unlevered property values were still 16.5 percent below their peak. Additionally, NCREIF’s Transaction Based Index (NTBI), showed unlevered property values in the first quarter of 2013 still 12.6 percent below the market peak.
Brad Case, NAREIT’s senior vice president of research and industry information, noted that the Moody’s and NCREIF indices tend to lag the market. Furthermore, Case said, they don’t cover all of the major property types and include smaller properties, which can affect their results.
Industrial Sector Improving
Commercial property values in the industrial sector, which have tended to lag the other sectors in previous months, were up 3 percent in April, according to the Green Street index.
“This looks like it was from B-quality properties in A locations,” Moore said. “There haven’t been many transactions in the industrial space, especially at the lower end of the spectrum. It looks like that’s changing, and we're starting to see lower-quality property transactions at reasonably high values.”
Strip center retail property values rose 1 percent in April, according to the Green Street Index, while the apartment, mall, office and lodging sectors held steady.
“It’s more of the same story with strip center retail. The lower-quality properties are playing catch up, perhaps due to the CMBS machine ramping back up which is where these properties tend to get financed,” Moore said.