08/21/2014 | By Sarah Borchersen-Keto
Increased demand for commercial real estate is causing the price of assets to overtake their value in certain property sectors, according to the latest Real Estate Research Corporation’s (RERC) quarterly Real Estate Report.
“The relationship between the value versus the price of commercial real estate is precariously balanced,” according to Ken Riggs, president and CEO of RERC, a national evaluation and research organization.
Increased demand, particularly for high-quality assets, is being fueled by the perception of real estate as a safe haven in the current uncertain investment environment, according to RERC.
RERC’s investment survey of large institutional and regional investors showed that certain property types, particularly apartment and retail properties, were seen to be fully priced or even overpriced in some areas.
“We are seeing pricing in most property sectors increase enough such that investors worry that a market correction is looming or that a bubble may be developing,” Riggs said.
At the same time, RERC’s survey noted that prices in cities including Boston, New York, Washington, D.C., Austin, Dallas, Houston, San Francisco, and Seattle were already slightly higher than the value of commercial real estate.
RERC’s value versus price ratings, which range from 1 to 10, with 5 representing a balance between price and value, declined for most property types during the second quarter.
The value versus price rating for commercial real estate overall declined to 5.4 from 5.5 in the first quarter.
The apartment sector rating declined to 4.6 from 5.0 in the first quarter, while the office sector rating fell to 4.9 from 5.5 in the same period. The retail sector rating dropped to 4.9 from 5.3 in the first quarter.
The industrial sector value versus price rating remained above the 5.0 level, but eased slightly to 5.7 in the second quarter from 5.8 the previous quarter.
Meanwhile, the hotel sector value rating rose to 5.7 in the second quarter from 5.5 the quarter before.
“When looking at the fundamentals, the hotel sector value is very positive,” said Patrick D’Sa, director at Situs, a commercial real estate and loan advisory services firm that owns RERC.
D’Sa noted that continued low interest rates, coupled with strong market fundamentals, have pushed capitalization rates in the hotel sector back down to pre-crisis levels. At the same time, he explained, there has been a surge in available debt financing from the investment community, as seen by the growth in commercial mortgage backed securities (CMBS) issuance volume.