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Strong sellers market for commercial real estate persists despite rising prices

Upper-end commercial real estate, particularly in high-priced locales like Manhattan and San Francisco, has lost some luster in the current market and is the least-attractive for investors in nearly two years, but there is little to fear that the appetite for these properties will dry up anytime soon, analysts say.  

Based on rising prices and levels of risk, institutional investors downgraded commercial real estate as an investment by one point, to 6.6 out of possible 10, according to a third-quarter survey by Situs RERC.

That ranking puts commercial properties as a better investment than stocks and bonds, but also represents the lowest score since early 2013.

Meanwhile, the investors rated the current market conditions for selling these properties at 7.7 out of 10, which makes it the best sellers market since midyear 2007, the Situs RERC survey said.

Situs RERC President Ken Riggs told Scotsman Guide News that institutional investors will continue to favor commercial real estate even though prices have risen above peak levels in top markets. Broadly speaking, he said, values and prices of properties are now roughly aligned across most sectors.

“The market, across the board, is fully priced for commercial real estate in general,” Riggs continued.  “That means it is not overpriced, it isn’t underpriced.”

As prices rise, though, investors will continue to have a harder time justifying the cost of the property versus its return, Riggs said.

“It doesn’t mean that the transactions won’t continue,” Riggs said. Riggs noted, however, that  “it is becoming a very strong sellers’ market versus a buyers’ market."   

Commercial real estate will remain highly attractive so long as interest rates don’t rise beyond about 100 basis points.

Riggs predicted that the Federal Reserve will raise short-term rates soon, but longer-term rates will only move up modestly.

Small-cap story

For small-cap commercial properties priced under $5 million, the story is much different, said Randy Fuchs, principal at Boxwood Means, which surveys trends in smaller commercial properties.

Global investors don’t chase small properties, Fuchs said. Investors seeking a fixed yield only represent a portion of the small-cap market, and a large percentage of the buyers of smaller commercial properties are purchasing a  building where they plan to conduct their business, he added.

“The prices in the small-cap CRE (commercial real estate) domain don’t have the same peaks and valleys as the large CRE market,” Fuchs said. “It didn’t dip quite as much during the recession, and certainly hasn’t recovered during the double-digit annual returns of the institutional market.”

Of the 117 markets that the company follows, prices of small-cap properties rose about 4 ½ percent year over year through August, and remain about 10 percent below the peak, Fuchs said.

 Fuchs noted that even in the large-cap world, however, the trends are not uniform. Prices have risen steeply in the top six markets, but not so much in secondary markets.

“What we can say is that institutional prices are at an all-time high, and certainly have exceeded peak levels of the market height before the crash,” Fuchs said. “Overall, for the small-cap world, there is still time and plenty of opportunity to find good investments.”

Like with larger properties, however, the small-cap domain has seen strong occupancy rates and a large number of property deals this year.

“Property sales have been very robust,” Fuchs said. “We are on record pace for the number of transactions.”


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