U.S. Commercial-Property Prices Seen Rising Near Peak

Prices for U.S. commercial property are expected to climb in the next six months, extending a rebound that has sent values close to levels reached at the market’s peak in 2007, according to Green Street Advisors Inc.

There is an 80 percent likelihood that commercial real estate prices will rise over the next six months, the Newport Beach, California-based research firm said in a report yesterday. Prices climbed 1 percent in February and are within 1 percentage point of their August 2007 high, according to the company, which tracks real estate investment trusts.

“We’re effectively back to peak pricing,” Mike Kirby, Green Street’s director of research, said in a phone interview. “We’re fairly confident that the rebound will continue.”

A “renaissance” in the issuance of commercial mortgage-backed securities will help boost prices, particularly for lower-quality properties, because financing will be more available, according to the report. JPMorgan Chase & Co. raised its 2013 CMBS sales forecast to $70 billion from $45 billion last month as issuance in January and February exceeded expectations.

Green Street’s commercial real estate price index is based on its estimate of the value of portfolios of REITs, which tend to own high-quality properties. Another measure of national values, the Moody’s/RCA Commercial Property Price Index, is 20 percent below its peak in November 2007.

REITs are trading at “moderate” premiums to net asset values, which historically has been a positive sign for prices of apartments, industrial and office properties, malls and strip shopping centers, according to the report. The spread between real estate returns and yields on investment-grade corporate bonds is also wider than usual, which is also a signal for climbing prices, Green Street said.

“Values of high-quality (i.e., REIT-owned) properties have recovered virtually all of their lost value, while prices of lower-quality assets remain mired in the doldrums,” according to the report, written by Kirby and Peter Rothemund. “A recent renaissance in the CMBS market –- issuance is back to ’04 levels -– bodes well for a narrowing of the gap.”

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