The sustained rise in prices of commercial real estate over the past seven years has prompted questions whether valuations may be getting ahead of themselves. Most recently, the Federal Reserve warned in its latest Monetary Policy Report of valuation pressures in commercial real estate markets.
Let’s take a look at four measures of valuations in commercial real estate:
- Cap rates and cap rate spreads to yields on Treasury securities;
- Price gains, and whether such gains are driven by rising net operating income (NOI) or declining cap rates;
- Economic fundamentals, including occupancy rates and growth of demand; and
- Leverage and debt growth.
None of these measures is flashing a warning signal, suggesting that commercial real estate prices remain on solid ground.
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