By Jim Costello on June 26th, 2018
Global commercial real estate prices now stand 78% higher than the low point set in 2009. The strongest period of growth over this period was from 2012 to 2015 when prices hit a 9.7% compound average growth rate. Should investors pin their hopes on stronger economic growth to drive this sort of price growth moving forward?
As the recent results of the Global Cities RCA CPPI illustrate, price appreciation is slowing and investors are struggling to find global investment opportunities with the double-digit returns seen in the recent past. As part of this struggle, investors are looking to growth opportunities as a solution.
Economic growth is great. All things being equal, one should do better holding an investment in a market that is experiencing strong economic growth. More job creation leads to higher incomes and growing demand for all sorts of commercial property. As demand grows, so will net operating income and, ultimately, property prices, so long as cap rates do not move against you.
Trends in the RCA CPPI clearly show that targeting markets and investment opportunities with stronger growth opportunities does generate stronger price growth. Oxford Economics publishes a set of data tracking employment growth across markets globally. Matching the growth in this data against the growth in the RCA CPPI for each market over the last five years, the stronger the pace of economic growth the stronger the growth in the RCA CPPI for that market.
There is, however, far more price growth across markets than the economic growth would suggest. Commercial real estate prices grew nearly five times as much as employment over the last decade. The strength of the real side of the economy was not the only factor driving price growth in the boom years. It was the financial side of the economy, in combination with growth in the real economy, that drove such healthy growth in prices.
Financial conditions are in a state of flux, however. The global credit easing which defined so much of the last decade is coming to an end. Quantitative easing is turning to tightening in the U.S., and such tightening is planned in other advanced economies.
Make no mistake, interest rates globally are still low relative to long-term trends. Low interest rates and yield-hungry investors are helping to support currently high property prices. Still, without the tailwind of declining interest rates to boost property price growth, most markets will not be able to grow at a pace sufficient to drive the double-digit growth in property prices seen in this cycle.
This article first appeared in the RCA CPPI Global Cities report, published May 17. To learn more about the RCA CPPI and to sign up for reports visit rcanalytics.com.