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A Lot to Be Thankful For

November 23, 2015

Here’s a perspective look on where we’re at, where we’re going, and why we can be thankful this time of year…

The price of a Thanksgiving dinner for 10 increased by a meager 1.4% this holiday season compared with last year, according to the American Farm Bureau Federation. Farmers have done better with their real estate value—up 2.4% from 2014, as reported by the U.S. Department of Agriculture.

Even these moderate gains exceeded overall inflation, as the CPI (consumer price index) rose just 0.2% over the past 12 months, restrained by low energy prices. The core CPI, which excludes food and energy, rose 1.9%, while the Federal Reserve’s favorite inflation metric, the core PCE (personal consumption expenditures) deflator, rose by 1.3%, both of which are below the Fed’s target of 2.0%. Despite low inflation, the Fed is likely to raise the short-term federal funds rate by a quarter-point next month for the first time since 2006. This will likely be the first in a series of rate hikes over the next two years intended to boost the pricing of capital toward historic norms, thereby reducing the potential for financial bubbles to wreak havoc on the economy.

Despite the impending rate hike, commercial real estate practitioners have a lot to be thankful for, as the industry continues to command strong pricing gains. Like farmers, property owners have enjoyed bigger gains with their prices than with the income earned from operating their businesses. Asking rents over the past four quarters have risen by 6.0% for offices, 4.5% for apartments, 3.9% for industrial space and 1.9% for retail space. These increases, though healthy, are eclipsed by the increase in the value of commercial properties over the same period—up by 15.0% as measured by the Moody’s/RCA Commercial Property Price Index.

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Labor shortages, long lead times for critical components, and subcontractor fees and availability are driving cost increases for commercial construction, up by 4.5% over the past year, as reported by the Turner Building Cost Index. Rising construction costs will support increasing property values by raising replacement costs.

Some in the industry note that property pricing is getting “frothy” (a favorite descriptor), while a more pessimistic subset suggests that prices are approaching or already in bubble territory, a term that implies the market will burst sooner or later. While this is possible, it could look more like what happens in a garden-variety recession—a moderate softening, as tenants retrench and the supply pipeline takes several quarters to empty out—than in a true bubble, where losses to lenders and investors impair the financial system and make an average recession much worse.

About the Author

Chris Falk SIOR, CCIM

Chris Falk is a Certified Commercial Investment Member (CCIM)—one of the most comprehensive commercial real estate designations, held by an estimated 6% of commercial brokers nationally. As a commercial real estate broker, Chris has handled over 600 transactions exceeding $475MM. Born and raised in Utah, Chris understands the unique qualities of the region and the great capacity for business opportunities in Northern Utah, including Davis, Weber and Salt Lake Counties. Chris is the premier, go-to agent for businesses and developers interested in this dynamic area.