Feds say CRE is an overheated asset class

Officials contend CRE values are out of line with Treasury securities
By: 
Mar. 23, 2018

Put the Federal Reserve Bank squarely in the camp of that believes commercial real estate values have become overheated, particularly for multifamily communities and industrial properties — two of the hottest sectors along the Gulf Coast and in Central Florida.

In a Feb. 23 report on monetary policy presented to Congress, the Fed notes that many economic measures continue to be favorable: Labor markets are tight, gross domestic product is increasing, consumer confidence is strong and business investment has rebounded from recessionary levels.

But central U.S. bankers also warn that certain investments, principally stocks and commercial real estate, may be over valued.

“Valuation pressures continue to be elevated across a range of asset classes, including equities and commercial real estate,” the report states.

And the trend is gaining momentum, not dissipating.

“Over the second half of 2017, valuation pressures edged up from already elevated levels. In general, valuations are higher than would be expected based solely on the current level of longer-term Treasury yields.”

The Fed single out commercial real estate values relative to the benchmark U.S. Treasury bonds, too.

“In a sign of increasing valuation pressures in commercial real estate markets, net operating income relative to property values (referred to as capitalization rates) have been declining relative to Treasury yields of comparable maturity for multifamily and industrial properties.”

The Fed also threw in a historical reference to the last time commercial real estate values accelerated considerably.

“While these spreads narrowed further from already low levels, they are wider than in 2007.”