Commercial Real Estate is Up, but is the Sector Recovering?

Commercial real estate prices are up, and even though some say the market is not truly recovering, there is additional evidence that commercial real estate is showing signs of growth and strength.
| Thursday, October 13, 2011

The latest hot trend in real estate in America continues to be commercial real estate, which so far in 2011 has outstripped the residential side of the house in terms of buying activity and upside potential.

Today’s news is a perfect example. Moody's announced that the Moody's/REAL Commercial Property Price Indices (CPPI) shot up another 5% in July, representing a total 12.6% increase in value from the indices' lowest mark over the past few years.

While the indices are only slightly above the average, the 5% gain represents the third month in a row of increases.

Why is that a big deal? On its own, the news isn’t a revelation of a new upward trend in commercial real estate that signifies a true recovery. After all, prices are still very low, far below the pre-recession peak. Low prices signify low demand for commercial space, brought about by lower consumer spending and fearful business investors who do not want to expand in the midst of what appears to be a shaky recovery, at best.

But, when coupled with other metrics, it presents a case that the commercial real estate market is far closer to a recovery than the residential market – and has plenty of potential for investors who can weather a bottoming process prior to the recovery.

Commercial real estate demand in the U.S. was on the rise before recent setbacks in the economy and financial world caused many developers to pause projects that were pretty far along in the planning and implementation process. With that being said, optimism still exists regarding the recovery of the commercial sector, particularly in big-city markets like New York, Los Angeles, Houston, Chicago, and Washington, D.C.

Industrial real estate, a component of commercial real estate, is also picking up steam. Vacancy rates have fallen and demand has risen, suggesting that producers are beginning the process of ramping up production capacity – which fuels office and retail rentals that form the other big slice of the commercial market.

Will the market bottom out before it recovers? Of course – no one is suggesting the market has already bottomed. But, it is fair to suggest that the commercial real estate market is well along in the bottoming process and has most of the components in place for a real recovery in the near future. For investors, that is definitely good news – especially if prices continue to rise like they have so far this year.

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