Commercial Real Estate: Values and prices become more aligned, but CRE remains overpriced, Situs RERC survey respondents say

Situs RERC’s value vs. price rating for overall commercial real estate (CRE) is still below average, even though the retail sector’s rating rose significantly in 4Q 2018 and 1Q 2019.

That’s according to data gathered for the May 2019 Situs RERC Real Estate Report, “Defensive Positioning.” The Situs RERC institutional survey respondents’ ratings are based on a scale of 1 to 10, with 10 indicating that value far exceeds price. A rating of 5.0 indicates that prices are being supported by values. Ratings under 5.0 are considered to be below average, indicating the market is overpriced.

Situs RERC’s value vs. price rating for overall CRE increased from 4.3 in 4Q 2018 to 4.6 in 1Q 2019, but remains slightly below the year over year (YoY) rating of 4.7. The value vs. price rating has remained below average since 1Q 2016, except for a spike in 4Q 2016, indicating the overall CRE market is overpriced relative to value. The current quarter’s rating is below the post-recession average of 5.0.

Here’s how the respondents rated the major property types:

OFFICE

The office sector has become increasingly overpriced over the past year. Although the value vs. price rating for office remained the same quarter over quarter (QoQ) at 4.6, the rating is significantly down YoY. However, the rating of 5.3 in 1Q 2018 may have been a blip as it has been below average every other quarter since 2Q 2017.

INDUSTRIAL

Survey respondents rated the industrial sector highest among the property types from a value vs. price perspective. The rating increased considerably from 4.7 in 4Q 2018 to 5.3 in 1Q 2019, but the rating was only slightly greater YoY, up from 5.2. The sector has been underpriced in every quarter since 4Q 2009, except for the below average ratings in 2Q 2018 and 4Q 2018.

RETAIL

Structural changes in the retail sector have led to volatile value vs. price ratings over the past two years. Even though the value vs. price rating has declined both QoQ and YoY, respondents have said the sector was underpriced for two consecutive quarters. The current quarter’s rating of 5.1 is equal to the post-recession average.

APARTMENT

The apartment sector was rated as the most overpriced by institutional survey respondents. The value vs. price rating for the apartment sector declined from 4.3 in 4Q 2018 to 4.2 in 1Q 2019. The current quarter’s rating declined considerably from 5.2 in 1Q 2018 and is well below the post-recession average of 4.9.

HOTEL

With a rating of 4.6, Situs RERC institutional investors maintained that the hotel sector was overpriced in 1Q 2019 despite an increase in the rating QoQ and YoY (4.3 and 4.5, respectively). In general, the rating has been below average since 3Q 2016.

Last week in Newswatch, we provided an in-depth look at results in the quarterly report for return vs. risk regarding the major property types. To view last week’s Newswatch, click here.

The Situs RERC Real Estate Report is the commercial real estate industry’s most respected and relied-upon survey-based resource of CRE investment criteria for risk analysis for over 45 years. This quarterly report is packed with a variety of valuation metrics, including cap rates, pre-tax yield/discount rates, and investor insights on the institutional, regional, and 47 major markets. To subscribe to the report, go to store.rerc.com or call 319.352.1500.

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