Is CRE in the US currently fairly, over, or under-priced? Tell us what you think and why.
I'd love to get a conversation started about everyone's thoughts about the commercial real estate market in the US right now. I know many have regional focuses and asset-type focuses, so feel free to share your thoughts on what you know most about! Macro thoughts/opinions are always great to hear as well.
Tough question. The beauty of illiquid real estate is that it isn't priced to perfection like publicly traded stocks. You can find great industrial sale-leaseback opportunities or underutilized land with redev potential for a steal if you're good. That being said, the pricing on most Class A Apartment/Office deals I've seen has been bonkers. It's getting to that point where Sponsor's are trying to underwrite to what they NEED to be true rather than to what is truly market.
Over-priced. Investors have made so much money in this cycle, going on 11 years. As a result, they have so much capital to deploy and put to use which is driving up values and trades. There is still value creation potential, but nothing like you would see in a down-market. Investors through this cycle have leveraged much more conservatively, also contributing to much fewer bankruptcies. All that combined with a low interest rate environment, real estate is currently priced very high and yields are very thin.
All of the above?
America is a massive country. Even within the same city, the answer could be different depending on product type, asset class, and submarket.
It is very difficult to make wide-sweeping pricing assumptions about all commercial properties in the United States.
So much focus on submarket too. I have no idea what it was like 10 yrs ago. Seems like the pure amount of resources available have made it a 5 block radius game as opposed to a city play. Then again, i may have no idea what I'm talking about...
Efficient market theory. Real estate as an asset class seems expensive but look at treasury yields in the US and abroad. Negative yielding government bonds abroad have forced foreign investors (and pensions) to hit the US treasury market in search of yield where we still have positive yields. Foreign inflows are further reducing yields on UST’s and so as investors go out on the yield curve, credit corporate bonds start to look attractive. Real estate does as well, given the in place cash flow. Stabilized core assets are incredibly safe, and generate a nice spread over treasuries even before adding leverage. Add in REIT cost of capital or sub 4% debt that many firms can borrow at on stabilized assets and you’re left with positively leveraged real estate assets with rent bumps baked in (inflation hedge). I think real estate is priced appropriately in the current environment as is the stock market. Globalization and QE throughout the world has structurally changed the world economy, and its likely going to be like this for awhile.
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