Commercial real estate booms

Updating my comments from January: U.S. housing starts have almost doubled in the past 5 years, and, according to Case-Shiller, housing prices have recovered 56% of their recession-era losses. But the recovery of the residential real estate market pales in comparison to the boom in commercial real estate, where prices have recovered substantially all of their recession-era losses, thanks to double-digit annual gains for the past 4-5 years.

Repeating the comments from this month's Co-Star report on commercial real estate:

COMMERCIAL REAL ESTATE PRICES CONTINUED TO CLIMB IN FEBRUARY. The two broadest measures of aggregate pricing for commercial properties within the CCRSI—the value-weighted U.S. Composite Index and the equal-weighted U.S. Composite Index— gained 1.5% and 1.4%, respectively, for the month of February 2015. Both indices have increased by more than 13% over the 12 months ending February 2015 as the pricing recovery for commercial property expanded into smaller markets and secondary property types.

HIGH LEVEL OF INVESTMENT ACTIVITY SUGGESTS COMMERCIAL REAL ESTATE WILL CONTINUE TO BE A SOUGHT-AFTER ASSET CLASS IN 2015. ... transaction activity through February 2015 suggests this will be another active year for commercial real estate acquisitions. The U.S. composite sales pair count of 2,357 and sales volume of $18.9 billion in the first two months of 2015 exceeded totals from the same period in 2014. Meanwhile, the share of commercial property selling at distressed prices fell from 32% in 2011 to less than 10% for the 12 months ended February 2015. 

The strength of commercial real estate belies the fact that this continues to be the weakest economic recovery on record. That's a conundrum which in turn suggests that 1) the economic fundamentals are arguably stronger than most people realize, 2) very low borrowing costs (i.e., easy money) are artificially boosting property values, and/or 3) commercial real estate never experienced a bubble of the magnitude that residential real estate did. I think government meddling in the mortgage market was a significant factor contributing to the overbuilding, overpricing, and eventual crash (think Fannie Mae, Freddie Mac, no-down payment loans, stated income qualifications, government guarantees, and interest-only loans). Things never got so carried away in the commercial real estate sector, where market forces were still operating to keep things more or less rational. 

In any event, a vibrant commercial real estate market is at the very least a source of comfort for us bulls. Things can't be that bad if commercial real estate values are increasing more than 10% per year.