The Aqueduct by Agrippa brings you a semi-weekly dose of CRE insights—just as ancient Roman aqueducts supplied water to fuel the growth of cities, we deliver exclusive resources to keep you informed.

Quick Overview

News Brief

A recent Marketwatch article suggests CRE investors are ready to get back in the market. Institutional capital is looking to ‘get off the sidelines and get back in,’ says Soultana Reigle, head of U.S. equity at PGIM Real Estate.

Key Takeaways

• Improved Investor Sentiment: Outside of the office sector, investor sentiment in CRE has significantly improved over the summer, with more investors exploring potential investments, particularly as valuations stabilize.

• Easing Refinancing Risks: The sharp drop in benchmark bond yields has helped ease refinancing risks, especially for borrowers outside the office sector, as rents are stabilizing or growing. The Federal Reserve's potential interest rate cuts could further support this trend.

• Ongoing Office Sector Challenges: While GreenStreet’s commercial property-price index has increased by 1.6% for all property types this year, office properties continue to struggle, with prices down 37% from their March 2022 peak. PGIM expects further declines in office values until corporate tenants stabilize space requirements.

Economic Insight

Green Street's Commercial Property Price Index® is a time series of unleveraged U.S. commercial property values that captures the prices at which CRE transactions are currently being negotiated and contracted.

Features that differentiate this index are its timeliness, its emphasis on high-quality properties, and its ability to capture changes in the aggregate value of the commercial property sector.

Key Points

• Property Price Growth: The Green Street Commercial Property Price Index® is up 1.6% in August and 3.3% this year.

• Impact of Bond Yields: Declining bond yields have driven the recent increase in commercial property prices.

• REIT Valuations: Share prices of many listed REITs are now higher than the underlying value of their properties.

Essential Knowledge

Yield on Cost (YoC), often referred to as Return on Cost, is a key metric that measures a property's stabilized net operating income (NOI) divided by the total cost. It helps investors assess the profitability of a development or value-add project.

Untrended YoC uses current market rents and costs, while the trended YoC accounts for potential future rent growth and cost changes, giving a forward-looking perspective.

Key Considerations

• Growth Expectations: Trended YoC relies on rental income and expense growth, which can vary based on economic conditions, making it a potentially unreliable metric.

• Location-Specific Factors: Local market trends, including supply and demand dynamics, can influence whether trended or untrended YoC better reflects the investment potential.

• Development Timeline: The longer the project timeline, the more uncertain and speculative the trended YoC becomes. For a more conservative evaluation, rely on untrended YoC.

Newsletter Recommendation

With family offices tripling since 2019, understanding their intricacies is vital for CRE professionals.

Mr. Family Office offers invaluable perspectives on these complex organizations, helping Agrippa users better navigate and leverage relationships with these increasingly important capital providers.

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About the Author: Blake J. Owens is the Founder & CEO of Agrippa. Previously, he closed over $600 million in transactions as the CIO of a Las Vegas based multifamily developer. Connect with Blake on LinkedIn and X for additional insights on CRE, economics, and more.