Are the current real estate markets over or undervalued?

The Fairbridge Partners team recently attended the Non-Traded REIT Industry Symposium in New York City. One of the most important issues discussed at the conference was valuation of real estate. Much debate surrounds this topic. Are the current real estate markets over or undervalued? In addition, what processes and analytics should be applied in order to value a property?

Traditionally, three metrics have been used to answer these questions: absolute cap rates, cap rate spreads and real (inflation-adjusted) prices. At the conference, COLE Capital, a net lease REIT, distributed an article entitled, “U.S. Commercial Real Estate: Expensive, Cheap or Fair?” In this article, they argue that real (inflation-adjusted) prices present the best valuation metric in today’s market. In their opinion, the first two metrics create distorted and diametrically opposed results. Absolute cap rates are defining values as up to 30% overvalued relative to its long-term average, while cap rate spreads are undervaluing assets against 10-year Treasury bonds. Real (inflation-adjusted) price analysis, however, indicates that the commercial real estate market is approximately at fair value with room for return on investment. This particular valuation approach measures an assets’ value by comparing it to changing construction costs. Historically, prices have increased in line with inflation. What is more, COLE Capital argues that, contrary to popular belief, interest rates do not create a lasting impact on commercial real estate prices since other factors complicate the equation, particularly fluctuations in rents and new construction. They also remind us that despite overall national trends, each sub market follows its own specific cycles, which can easily lead to a good investment opportunity in one particular area.

Fairbridge Partners believes the same. Investment opportunities do exist. We are committed to finding assets within undervalued markets, buying it, repositioning it, and selling it when the market becomes overvalued and the asset can give the optimum gains. Contact us for further information in relation to how we are adjusting our focus to take advantage of currently undervalued assets and create opportunity for our investors.