CRE cycle heading for an end in 2016: report

Market signals "notably more bearish," according to Green Street Advisors

New York /
Dec.December 10, 2015 12:01 PM

There’s been a lot of buzz lately about when, exactly, this current commercial real estate cycle will come to an end – when property values have truly peaked and the game winds down in a manner either gradual or, as seen in 2008, sudden and abrupt.

Real estate research and advisory firm Green Street Advisors says the end is not far off, noting market signals that “have become notably more bearish” and calling for commercial property values to drift lower over the course of 2016.

The Newport Beach, Calif.-based firm’s Commercial Property Price Forecast has seen “very bullish signals for real estate values from 2009 up until the first quarter of this year,” Andy McCulloch, Green Street’s managing director for real estate analytics, said.

“Since then, however, the signals have become notably more bearish, and there is now a good chance that commercial real estate prices will be lower within the next 12 months,” McCulloch added.

Green Street’s forecast factors both a comparison of real estate pricing versus yields in the corporate bond market, as well as how listed real estate investment trusts, or REITs, are trading relative to the underlying value of their properties.

Both metrics have underwhelmed in recent months, however — with corporate bond yields hitting a three-year high last month as property value appreciation has slowed and reports in September that REITs were trading at nearly a 15 percent discount to what investors would pay for buildings individually.

Those factors, as well as the increasing likelihood that the Federal Reserve will raise its benchmark interest rate when it meets later this month, have contributed to increased concerns regarding the future of this current commercial real estate cycle.


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