1Q CRE Bank Collateral Value Update

According to the latest data from Moody’s/RCA CPPI, the value of commercial real estate rose by 0.5% in March bringing the total appreciation rate for 2017 to 0.8%. This has been in-line with most bank’s projections that forecasted an average of 3% for the year, or 0.75% for the quarter.  Most of this growth was a result of demand in major metro markets, as smaller markets saw a decline in value of 0.2%. Office properties in a metro’s core posted the strongest appreciation coming in at 2.4%, while multi-family was the weakest sector showing a decline of 0.5%.  While this is two back-to-back declines, we remind banks that this is the same thing that happened in 4Q of last year, but then the sector resumed their upward appreciation in November.

 

CRE Bank Collateral Change 

 

As can be seen in our heat map above, while retail has bounced back, it is still down for the year as is industrial properties.

 

The other set of metrics that we track (and that makes us nervous) is the comparisons to last cycle’s peak. Major metro properties are up 21% compared to the peak, while all office is 29% above and multi-family is now 32%. 

 

Change in CRE Value from peak

 

We believe we in the 6th inning of the business cycle and the current Trump Administration will likely serve to extend the cycle but further inflate the asset appreciation bubble. This will be positive in the short-term for banks, but we believe will create greater long-run risk. The numbers above helps us better monitor CRE performance to enhance risk management.