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Prolonged growth can make investors nervous

On Behalf of | Jun 26, 2017 | Commercial Real Estate |

Commercial property values have climbed steadily in recent years, and developers in California cities like Los Angeles and San Francisco have enjoyed particularly healthy returns. However, investors tend to become anxious after several years of sustained growth, and this uncertainty may soon begin to influence prices according to industry experts. More than half of the respondents to Knight, Dorin & Rountrey’s 2016 market survey said that they were optimistic, but less than a third feel that way now according to the Virginia-based appraisal and consulting firm.

The Green Street Commercial Property Price Index tracks the value of real estate investment trust asset portfolios, and it had a significant increase in 2015 as the economy thrived and prices soared. However, the index inched up by a mere 1 percent in 2016 and actually fell slightly during the first quarter of 2017. Part of this can be put down to concerns over rising interest rates and stricter banking regulations, but experts say that stagnant REIT values are also a sign that investors are becoming reluctant.

This does not yet seem to be affecting market prices. The Moody’s/RCA Commercial Property Price Index reveals that year-over-year values are up by 7 percent and now sit more than 20 percent above their pre-financial crisis peaks. Apartment prices are now 53 percent higher than their pre-crisis levels, but fears of a peak and developing asset bubble could prompt investors to tread more carefully in the year ahead.

While location may be the most important factor in commercial property development and investment, timing can also be crucial. Developers who are able to complete their projects quickly are better able to withstand market uncertainties, and attorneys with experience in this area could help them to achieve this goal by addressing legal issues and disputes promptly.

Source: Green Street Advisors, “Prices Up 1% Year over Year”, June 6, 2017