In spite of several economic indicators continuing to exhibit stability, there are signs that property prices are at peak levels and are poised to drift below record highs.
“Properties look expensive. If this isn’t the peak, we’re probably close,” said Peter Rothemund, a senior analyst at Green Street Advisors.
“Green Street’s Commercial Property Price Forecast sent very bullish signals for real estate values from 2009 up until the first quarter of this year,” added Andy McCulloch, managing director of Real Estate Analytics.
“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 twelve months.”
Rothemund’s firm recently released its Commercial Property Price Index, which showed property prices going up 10 percent for the year.
The strongest gains were in the apartment (14 percent), mall (12 percent) and self- storage (19 percent) segments. While the price hike was significant, Rothemund remains uncertain about the prospect of continuous growth.
“Cap rates have been holding firm, and in some instances, even moving lower as investor demand for commercial property remains strong,” Rothemund said. “The question is whether that trend will continue. Cap rates look low when they’re compared to corporate bond yields.”
On a local scale, the situation is similar. According to Cushman & Wakefield’s recent property sales report, the price per s/f in New York City stood at $495 during the third quarter. This represents an eight percent increase compared to 2014 numbers, but is mostly level with other 2015 quarterly figures.
“2014 was the best investment sales market I have seen in 32 years,ˮ said Bob Knakal, Cushman & Wakefield’s chairman for New York investment sales.
“Thus far, 2015 has been putting up a valiant challenge to that title. In some ways, it is not quite measuring up and, in others, it is well on the way to making history.”
For the third quarter, Cushman & Wakefield recorded the dollar volume for citywide investment sales was at $17.9 billion, which makes it one of the highest in history. All three quarters in 2015 landed in the top five. Also, the year-to-date total of $55.4 billion is almost equal to 2014’s annual volume of $57.9 billion. However, the growth in property prices was more modest. The highest increase was in multifamily properties, which rose $105 per s/f to $976 per s/f across the city.
The growth in U.S. property prices coincides with upswings in several economic indicators. In November, the US economy added 211,000 jobs, which beat analyst forecasts. While the unemployment rate stayed at five percent, the Labor Department revised upward its job creation estimates for September and October by 26,000 jobs.
Mortgage rates have also been low. According to a Freddie Mac survey published last week, the 30-year fixed-rate average was at 3.95 percent. It has been below four percent for the past few months.
However, mortgage rates, and in turn, property prices, are facing pressure from an expected interest rate hike from the Federal Reserve. There are fears among developers that a rate increase would create an affordability problem and bring projects to a halt.
Jonathan Miller, the president and CEO of real estate appraisal firm Miller Samuel, downplayed such worries. “If it doesn’t happen this month, then it’ll happen next year and it won’t be a big deal,” he said.
When the Fed last raised interest rates in 2006, the rate for a 30-year fixed-rate mortgage was at 6.68 percent.