With the exception of the industrial sector, all major commercial property types were considered overpriced in 2Q 2019.
That’s according to research from RERC, a SitusAMC company.
RERC’s value vs. price rating for overall CRE increased to 4.7 in 2Q 2019 from 4.6 in 1Q 2019 and 2Q 2018, indicating the overall CRE market is overpriced relative to value. The 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.
- The value vs. price rating for office remained the same quarter over quarter (QoQ) at 4.6, indicating that the sector is overpriced. The rating is down year over year (YoY) from 4.9. Besides a brief spike in 1Q 2018, the office sector rating has been on a general downward trend since the end of 2014. The current quarter’s rating is below the post-recession average of 5.0.
- The industrial sector value vs. price rating declined from 5.3 to 5.0 QoQ; however, it was the only property type that was not rated as overpriced in 2Q 2019. One year ago, the sector was only slightly more overpriced, with a rating of 4.9. Since the GFC, the sector has been underpriced except for two quarters: 2Q 2018 and 4Q 2018; however, the sector has been moving closer toward fairly priced over the past three years.
- The retail sector’s value vs. price rating has been volatile over the past two years. Following two consecutive quarters of being underpriced, the sector is once again overpriced with a rating of 4.8. The rating declined from 5.1 in 1Q 2019 but remained the same YoY. The current quarter’s rating is below the post-recession average of 5.0.
- The value vs. price rating for the apartment sector bumped up to 4.8 in 2Q 2019 from 4.2 the previous quarter, but it is down YoY from 5.1. Apartment was the only sector to experience a quarterly increase in ratings (i.e., investors are seeing significantly greater value for the price). The current quarter’s rating is only slightly below the post-recession average of 4.9.
- RERC institutional investors maintained that the hotel sector was overpriced in 2Q 2019, with a 4.5 rating. The current quarter’s rating is down both QoQ and YoY, from 4.6 and 4.8, respectively. In general, the rating has been below average since 3Q 2016 and is below the post-recession average of 5.1. The hotel sector was rated as the most overpriced among all property types in 2Q 2019.
RERC is the nation’s first firm dedicated to CRE research. RERC produces a quarterly report 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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