Recent data, just released from Real Capital Analytics, shows that since the start of the year (month-end April), commercial real estate (CRE) has appreciated 2.6% in 2019. This is good news for banks as it shows that every significant loan sector likely has improvements in both debt service coverage and loan-to-value. In major markets, this appreciation has been closer to 4.9%, and in secondary markets, price appreciation has been 1.5%. In this article, we take a look at the details to help banks better manage their pricing and risk.
Best Performing CRE Sector
Overall, CRE is ahead of last year’s pace but behind both 2016 and 2017. Using year-to-date April data, on an annualized basis, CRE property values are on pace to grow 7.8%.
In terms of particular property performance, on a year-to-date basis, industrial properties have appreciated the most at 5.1%, followed by office in core, urban markets at 4.8% appreciation. Retail has lagged the most producing a 0.9% growth rate.
Where Are We Compared to 2006?
In case you are getting nervous, this won’t help. Compared to the pre-crisis peaks in 2006, CRE has appreciated almost 29% above those levels, on a nominal basis, making many bankers nervous. Properties in major markets have done the best with a 47% appreciation level above their pre-crisis peak, while secondary markets are up 20.3%.
From a sector perspective, multifamily has been on proverbial fire jumping an eye-opening 70.1% followed by core office has increased by 41.2%. Retail is the only sector that is lower than its 2006 peak, producing a negative growth rate of 2.5%.
Putting This Into Action
Recent lower rates are likely to serve to increase these numbers more as we have seen a steady uptick in demand in June for refinanced CRE loans. Lower rates will reverse recent trends in capitalization rates further supporting property appreciation.
We continue to recommend proactively refinancing existing loans where there is no prepayment protection in order to prevent competition from making offers and taking quality customers away. Further, we also recommend reducing pricing and increasing credit quality to enhance the late cycle credit cushion.
Submitted by Chris Nichols on June 17, 2019