CRE Prices Crest Pre-Recession Peak

The latest Moody's/RCA Commercial Property Price Indices (CPPI) report was released this week, revealing that in August the CPPI rose 1.6%, topping its pre-crisis peak on a Consumer Price Index (CPI) adjusted basis. According to the report, which captures the national all-property composite index over the past three months, the CPPI now stands 14.5% above its pre-crisis peak on a nominal basis and 1.5% above it on a real, CPI adjusted basis. Central business district (CBD) office was the best-performing segment, while core commercial property prices are approximately 8% higher than their prior peak,

"Central business district office was by far the best-performing segment of the CPPI in the past three months, with prices rising 6.3%," says Moody's Director of Commercial Real Estate Research, Tad Philipp. "Suburban office was the next-best-performing segment, with prices up 3%."

Jim Costello, RCA's senior vice president, said prices have been pushed up because the capitalization rates have been falling. The cap rate is a commonly used formula for valuing a commercial-property investment. It's calculated by dividing a property's net operating income by its current market value. If the cap rate falls while the expected income from the property remains roughly the same, the asset values tend to rise. "Most of the strong price appreciation we've seen to date has been a function of cap-rate compression, something like 70% of the price increases, in fact," Costello said.

Moody's/RCA researchers note that the only property sectors where prices have not exceeded their pre-recession peak are retail (still down 7%) and suburban office (down 9%). Moody's research subscribers can access the latest report here. For more news and information visit Blumberg Partners.