The Real Deal New York

As corporate bond yields climb, questions hang over CRE market

With Fed rate hike imminent, speculation rising over commercial market's viability moving forward

December 04, 2015 02:55PM

Green Street CPPI

Green Street Advisors’ Commercial Property Price Index

Corporate bonds yields are on the rise as macroeconomic factors are increasingly casting doubts on the future of the global commercial real estate market.

Yields on corporate debt hit a three-year high last month, and with the Federal Reserve bracing for its first interest rate hike in nine years, property investors are showing more caution and price appreciation is already slowing, according to real estate research firm Green Street Advisors.

Real estate values have surged since 2010 thanks to cheap loans, the desire for greater yield and a flood of capital coming from foreign buyers seeking wealth havens, according to Bloomberg.

The most desirable office properties in cities like New York and San Francisco are commanding prices 57 percent higher than the height of the previous real estate boom in 2008, according to Moody’s Investors Service and Real Capital Analytics.

But that climb has fueled speculation that the cycle’s end may be imminent, with the Fed recently highlighting commercial real estate values as potentially showing signs of overheating.

Real estate has benefitted from low yields on corporate debt in recent years, with investors seeking riskier assets to boost return. But with bond yields on the rise, there is speculation that investment in commercial properties is looking relatively less alluring.

In a report released Friday, Green Street Advisors’ Commercial Property Price Index – which tracks unleveraged U.S. commercial property values – was up 2 percent in November. The index reported that property prices were up 10 percent for the year thus far, matching gains seen last year.

“The question is whether that trend will continue,” Green Street senior analyst Peter Rothemund said in the report. “Cap rates look low when they’re compared to corporate bond yields. Said another way, properties look expensive. If this isn’t the peak, we’re probably close.”

The research firm’s Midtown Manhattan Office Price Index was up 2 percent in November – marking a 7 percent increase in the last 12 months and taking it 14 percent above 2007 peaks. [Bloomberg]Rey Mashayekhi