CRE Prices Fully Recovered From Recession

Measuring the price of U.S. commercial properties in the aggregate is a tricky thing.

Measuring the price of U.S. commercial properties in the aggregate is a tricky thing. A good metaphor might be the view from a satellite rather than the cinched 30,000-foot view. But whatever the metaphor, a well-designed high-level index illustrates trends above the level of a particular kind of real estate or metro market, and they do it well. Last week Moody’s and Real Capital Analytics released their Commercial Property Price Indices (CPPI), and one trend was clear: as an asset class, commercial real estate has fully recovered from the recession at last.

The current rise in prices is being led by the office sector and industrial sectors. The CPPI all-property index rose 1.6 percent in August, led by a 2.6 percent rise in the both CBD office and industrial properties. (The CPPI measures price changes based on “repeat-sales,” or completed sales of the same properties.)

Also, CBD office was the best-performing segment of the CPPI by far in the past three months, with prices rising 6.3 percent, according to Moody’s director of commercial real estate research Tad Philipp. Suburban office was the next-best segment, with prices up 3 percent for the period. That points to strong demand for center city office and its access to urban amenities (transit, retail, walkable green space), but not completely at the expense of suburban office properties. A good many companies still want to be in the suburbs.

Moreover, the all-property composite index has now passed its November 2007 peak on a real basis, with the values adjusted to account for the slow but sure rise in the CPI since the beginning of the recession. The CPPI is now 1.5 percent higher than the peak, the first time it’s surpassed the peak on a real basis. On a nominal basis, it’s 14.5 percent higher than the peak. (In the residential sector, the headline rise in housing prices is typically reported on a nominal basis, and as such it too has passed the 2007 peak; but not yet on a real basis.)

Though office price growth has been driving the index in recent month, the strongest appreciation in recent years has, unsurprisingly, been led by income-generating rental housing. U.S. apartment prices now exceed their pre-crisis peak by about 33 percent in real terms, while core commercial property prices are about 8 percent higher than their prior peak.