Valuation in a Vacuum? Two Indexes, Two Views on Commercial Real Estate
After almost two years of continuing downturn in commercial real estate prices and returns, there is still great confusion in the land.
The article points out the near complete divergence of opinion on trends in market value in commercial real estate. The Green Street Advisors index is a measurement formed by the REIT industry, with input from brokers, economists, and REIT executives. Green Street Advisors also admits that this index is subjective.
By contrast, the Moody's index tracks all property sales above $2.5 million. This index is more broad based and also tracks repeat sales.
We agree that the Green Street Index views a very narrow segment of the market, and is a reflection of the ability of REITs to pay top dollar for prime assets. This is a function of very low yields on Treasury bonds. When 10-year Treasuries are yielding about 2.5%, investment in a prime commercial asset at 6% or 7% is considered viable.
The Moody's index is a more general, or "ground level" view of the stress on commercial real estate markets.
In our practical experience, we find that neither of these indexes portray what is really happening.
As in many things, the truth lies somewhere in the middle.
And, as of October 27, 2010 - this just in from Moodys:
"An index compiled by Moody's Investors Service found that commercial property prices have started to slide again. The Moody's/REAL Commercial Property Price Index was 105.37 in August, down 3.3% from July. Moody's said the latest reading is the lowest since early 2002. Not all sectors of real estate had declines. Moody's said prices were down for retail and industrial properties but were up for office buildings and apartments." Let me know what your thoughts are on which way we are really going.....email me at the link below.
- Steven R. Norris, MAI, CRE
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Greetings!
In this issue of our newsletter, we bring you up to date on the most recent Counselors of Real Estate annual meeting in Chicago, including a panel with several Federal Reserve Commercial Real Estate Specialists. Also, an update on a recent court victory aided by our expert witness work, and finally, something to keep us smiling in the midst of tough times.
Thank you for taking the time to connect with us.
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CRE 2010 Annual Meeting By Steve Norris
I have just returned from the 2010 Annual Meeting of the Counselors of Real Estate, held this year in Philadelphia.
Highlights and observations of industry leaders included:
- In the office sector, the true effect of the recession is the "5th desk" phenomenon, where almost every fifth desk is vacant.
- REITS are among the only investors active in the present market, as their costs of funds is significantly lower.
- This is a "very rugged office leasing environment" on a national scale.
- Valuation in this market is increasingly difficult, highlighting the need for consultants to spend ample time interviewing market participants in order to understand real motivations.
- At present, there are 5 job seekers for each available job.
- New business formation is at historic lows; the entrepreneurial spirit in America is presently dormant.
- Nationally, housing prices may decline further from 5% to 10% in the next year.
- At present, 9% of the $700 billion CMBS market is delinquent.
- We will not be "out of the commercial real estate woods" for another 3-4 years.
As a part of the Counselors of Real Estate, our firm brings the best in market intelligence to our clients.
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Litigation Support Yields Court Success
Over the past several years, our firm has been involved in a number of challenging assignments involving issues related to renewable energy.
Recently, our litigation support efforts resulted in a significant court victory for a private land owner facing public utility easement condemnation action in Kern County.
A major public utility has been acquiring land for a renewable (green) power line corridor through Kern County over the past several years.
Our expert witness services resulted in a court victory yielding twice the original land value offered by the utility.
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NIMBYS
For some time now, it seems that virtually any kind of new development, in any venue, is opposed by some special interest or environmental group.
Some time ago, I had a good friend and very experienced commercial real estate investor comment to me, "There are three kinds of allowed developments these days.....nothing, nothing, and nothing".
For a perfect example of the logical direction of this trend, go here, to see a video that illustrates this phenomenon quite well.
Hat Tip to our friend Paul Norlen.
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