July 31, 2017

Andrew Little


BY ANDREW LITTLE Special correspondent - Jun 18, 2017

Much like one of Tennessee’s state songs, “Rocky Top,” commercial real estate values are peaking, and it is a little rocky at the top.

It is not uncommon to read a headline reporting surging stock, gold or bond prices while simultaneously reading about investors’ fear that a great drop-off is imminent.

The same is true of commercial real estate. The more values surge, somehow, there is greater fear that a cliff is right around the corner.

Some of the fear seems warranted, but there also are some compelling reasons why this time it may be different.

According to the Moody’s/RCA Commercial Property Price Index, prices again set a new high in April, the latest month published. And when including all properties, values are up 7 percent in the past 12 months.

The data from the index show apartment prices are now 53 percent above the pre-crisis peaks reached in 2007, while core commercial prices are up 13 percent. Overall, the index is up about 23 percent from its pre-crisis level.

Interestingly, the Green Street Commercial Property Price Index for commercial properties, which tracks REIT-owned property values, shows prices peaking, but the index is slightly off from its high point reached in January.

Year-over-year, that index is up 1 percent from May 2016, but values are down slightly this year.

While it is difficult to say commercial real estate has reached the top, many in the industry feel it has at least reached some plateau.

So why is this time different? Well, it may not be.

Probably the largest difference between today and June 2007 is the yield on the 10-year Treasury.

Ten years ago, the yield on the 10-year Treasury was approximately 5.25 percent. It now stands at 3 percentage points lower.

Since debt makes up a large portion of a property’s capitalization, the higher rates of 10 years ago effectively kept a floor on cap rates.

While the commercial real estate world is fixated on the Federal Reserve’s next move, few people believe rates are going up by 1.5 percentage points in the next year — much less 3 points.

Another sign that the industry may be reaching a peak locally is the results from the annual Knight, Dorin & Rountrey Real Estate Market Survey.

The survey, which tracks commercial real estate in central Virginia, found 31 percent of the respondents were optimistic about the future, showing a “maturing of the real estate cycle.”

That’s down from the 2016 survey, which showed 55 percent of the respondents were optimistic about the future.

John B. Levy & Co. investment banker Andrew Little can be reached at