Why Investors Shouldn't Fear CRE's High Prices
“Just because the price of a piece of property has risen dramatically does not mean its value cannot and will not continue to rise.”
High prices on properties shouldn’t scare off real estate investors, says John Chang, Senior Vice President and National Director Research Services at Marcus & Millichap in a video.
“Just because the price of a piece of property has risen dramatically does not mean its value cannot and will not continue to rise,” said Chang.
What matters, said the Marcus & Millichap expert, is the purchase price today, cash needed to buy, rates and terms for a loan, cash flow today, cash flow in the future and price at time of sale.
“(Investors) should focus on two things: the value of cash flow from that property today and the value of cash flow from a future disposition date, Chang asserted.
The history of the rise and fall in a particular piece of real estate over the last several years is irrelevant, he contended.
Chang noted appreciation has been strong in the last year in a number of property types in commercial real estate. He pointed out year over year the US average increase for multifamily has been 16.1% with 12.7% for retail, 10.9% for office and 21.7 for industrial. In certain cases, there have been huge gains for some markets including a 35.4% hike for multifamily in Phoenix and 32.1% for office in Atlanta.
Chang provided more nuance for investors in an earlier video last month, when he noted that investors would be well-served to consider the three- to five-year supply and demand outlook before snapping up assets.
Consider industrial, an asset class that’s up 22.3% over pre-pandemic levels, with revenues up by 11% and vacancies at a low near 4%. Despite that gap, “investors are purchasing these properties based on rising demand driven by e-commerce and supply chain disruptions,” Chang says. “But even though industrial absorption is at a record level, so is construction, and new development could ultimately bypass demand.”
It’s a similar story for multifamily.
“There’s a lot of speculation that apartment pricing is overheated,” Chang says. “We’re seeing cap rates hit record lows and record high prices in many markets, mostly high population growth areas.”
The average price per unit for apartments nationally is up 11.9% over end of 2019 levels, according to M&M data, but revenues are up by 12.6% and vacancies are at a record low of 2.8%.