The prices of commercial properties have made a spectacular recovery in the past two years, with a rise of 48 percent from early 2009. This seems positive, but let’s take another look. Commercial real estate prices have possibly not recovered at all. Rather, prices are still struggling to gain some meaningful traction after a disastrous cut in valuation by half from the peak in 2007.
The two most watched price indices for commercial real estate are not saying the same thing. The Green Street Advisors price data has recovered but the Moody’s/MIT data has not. What the heck is going on?
The indices are applying different methodology. The Green Street data sample is not as clear and surely not as extensive as MIT’s. Green Street captures the negotiated prices on contracts and not the actual price at closing as captured by MIT. Green Street is also weighted by the size of the property valuation while MIT gives equal weight to all property transactions.
My interpretation of the two data series is that commercial prices are still down and out, but there are hopeful early signs as indicated by negotiated prices, particularly on ‘trophy’ properties likely based in expensive regions of New York, San Francisco, and Washington, D.C. There appears to be plenty of cash ready to chase commercial real estate (based on my informal conversations with some players). Evidently the early chasers are looking only at class-A properties in prime locations.