The Chase For Trophy Properties Stands Out In A Slow Market

The Moody’s/REAL Commercial Property Price Indices (CPPI) saw a 3.1 percent decrease in July, the second consecutive month that the price decline has exceeded 3 percent.

Neal Elkin, president of Real Estate Analytics LLC, said the continued “bounce along the bottom” was to be expected by most observers following the commercial real estate market.

“If you look at the issues that are overhanging the market,” Elkin said, “The general economic malaise is going to prevent strong, across-the-asset-class movement in price.”

Elkin said commercial real estate market fundamentals currently offer few positive signs. Nationally, the average of commercial real estate prices is only 0.9 percent higher than they were at the low point of the recession in October 2009.

Looking at regional differences over the past year, there are weaknesses in a variety of sectors. In the eastern part of the U.S., the industrial sector was the only segment showing a decline, down 27 percent while the other asset classes made modest gains. In the south, only the industrial sector posted gains, with the retail market decline hitting 31.5 percent, more than double the national average.

Amidst all the fluctuation in markets around the country, Elkin said he is seeing demand for “trophy assets,” those that have stable rent rolls in primary markets. Until the overall economy begins to stabilize, these assets will continue to lead a large bifurcation of the market, according to Elkin. According to Elkin, because of the lack of confidence in the current economy, especially the slow job growth, investors are focusing on properties with only the highest level of stability in terms of occupancy and rental rates.

“There is an enormous wall of capital on the sidelines, and it is chasing these trophy properties,” Elkin said.

In California, for example, Elkin pointed to how the highest quality office and apartment assets in Southern California and San Francisco are showing respectable increases, while the other sectors are still in decline.

Along with the two California markets, the CPPI has grown in Boston, Chicago, New York and Washington D.C. because of the amount of trophy properties being sold, while the rest of the country has been slow to recover.

“Since October 2009, the CPPI has been flat,” Elkin said, “but prices and values in those six cities are up 20 percent.” (credit j flynn)

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