Situs RERC Value vs. Price – 1Q 2017

To better understand valuation trends in the CRE market, Situs RERC surveys institutional and regional investors about relative value vs. price in particular markets and regions. Ratings are made on a 10-point scale, with higher ratings indicating that values exceed prices – and investors can get more “bang for their buck.” For CRE overall, the value vs. price rating fell to 4.7 on a scale of 1 to 10, with 10 indicating that value greatly outweighed price, during first quarter 2017. According to Situs RERC’s survey respondents, CRE overall was slightly overpriced relative to value. While this was the lowest rating since third quarter 2009, the rating was comparable to early 2016.



Among the sectors, the industrial sector offered the most value compared to price, with a rating of 5.5 on a scale of 1 to 10 during first quarter 2017, but this was a decline from the previous quarter. Optimism remains high for the industrial sector, however, as respondents suggested that there was more value for their investment relative to price coming into the industrial sector compared to the other property sectors surveyed. Much of the industrial sector demand has been driven by e-commerce, third-party
logistics providers (3PL), food and beverages, and consumer goods.

The office sector’s value vs. price rating increased for the second consecutive quarter to 5.1 as respondents considered values and prices at equilibrium, similar to the previous quarter’s results. Office supply and demand appear to have been in sync for many quarters in a row as a majority of office landlords have enjoyed stabilization and solid cash flow.

The retail sector’s value vs. price ratings were the most varied among the property types. The rating declined to 4.6 and was the priciest investment option compared to value. Although the average value vs. price rating was close to equilibrium for the sector, approximately 40 percent of experts felt that the sector was significantly overpriced relative to value and 20 percent said that values outweighed prices. The variability of responses shows the vast ebbs and flows occurring in retail. Innovative and creative retail investors have found recent success in the retail space, while other retail investors have experienced (in some cases) double-digit losses.

The apartment sector’s rating declined to 5.0, indicating that the apartment sector was considered fairly priced compared to value. In the past, during economic expansions, the apartment sector has had a tendency to become overbuilt. The U.S. Census Bureau reported that during first quarter 2017, the number of new homeowners outstripped that of new renters for the first time in a decade. As the economic recovery continues, apartment sector rent growth, vacancy and net absorption will be key in indicating the health of the apartment sector.

During first quarter 2017, Situs RERC’s institutional investment survey respondents had mixed opinions about the hotel sector. While respondents generally felt that the sector has performed well over the past year, overbuilding was a concern. The hotel sector rating rose to 5.0 where values equaled prices, comparable to the apartment sector. The hotel sector produced healthy performance metrics in 2016, and the same can be said through the first quarter of 2017. While the hotel sector can be extremely volatile and consumer-dependent, Situs RERC’s survey respondents seemed relatively optimistic at the onset of 2017. Performance in the sector could slow if the economy loses steam, yet many of the largest players in the business have improved their balance sheets since the recession of 2008.


In the West, the value vs. price rating for overall CRE continued to indicate that values supported prices during first quarter 2017, according to the region’s respondents.
While ratings for the office, industrial and hotel sectors showed that values and prices were aligned, ratings for the retail and apartment sectors indicated that prices slightly outweighed values in the first quarter.

Overall, CRE was considered fairly priced compared to values during first quarter 2017 in the Midwest, according to the region’s respondents. However, compared to the previous two quarters, respondents considered overall CRE slightly pricier relative to value. The industrial sector value vs. price rating indicated that values were strong relative to prices. In contrast, respondents considered the office, retail, apartment and hotel sectors overpriced compared to value. Some respondents even commented that investors interested in apartments are becoming reckless.

In the South, values supported prices for overall CRE during first quarter 2017, according to the region’s respondents. Among the individual property sectors, the value vs. price ratings suggested that values generally supported prices. The industrial sector offered the most value relative to price compared to the other property sectors. In comparison, the value vs. price rating for the hotel sector was the lowest among the property types.

The value vs. price rating for overall CRE in the East increased quarter-to-quarter and indicated that values were slightly elevated compared to prices, according to the region’s correspondents. While prices had room to grow compared to values for the industrial sector in the first quarter, the office and apartment sectors were considered fairly priced compared to values. For the retail and hotel sectors, respondents were concerned about overpricing relative to value.

For more information, please contact Ken Riggs. To download the PDF version of this, please click here.