At NBI Properties in Fort Walton Beach, September was the busiest month for closings and listing activity was brisk. Craig Barrett, co-founder and broker, said booming business has more people asking if commercial real estate properties are overvalued and priced too high.
“As prices have continued to surge, some investors are worried that valuations may be overheating,” said Barrett. “Some think the market is reaching bubble levels as a combination of high demand, low interest rates and loosening loan underwriting standards have caused a record spike in prices paid per square foot for commercial properties.”
Although many investors and analysts agree the surging demand for commercial property should be closely scrutinized for signs of overheating, several market indicators appear to justify the uptick in prices. So while peaking prices are a concern, analysts are saying it is premature to characterize the recent valuation increases as a ‘bubble’ that will inevitably lead to a market correction.
“The price increases we’ve seen over the past 12 months appear to be the result of a long period of low interest rates in a low-yield environment,” Barrett said. “We are still seeing a wide pricing gap for taking risk that did not exist in 2006 and 2007 when vacant buildings could fetch premium pricing. Using the term ‘bubble’ to describe current pricing gives the wrong impression that the market is not stable and is ready to burst.”
Showing a measure of caution following recent stock market volatility and swings in August and into September, property investors appear to be taking a pause to assess conditions, with previously acquisition-minded investors now saying, “Not so fast.” Price appreciation has also slowed, both from earlier this year and compared with the early to mid-recovery period from 2010 to 2013.
“Investors and our clients prefer to buy closer to the bottom, although now it seems we’re closer to the top,” Barrett said. “However, market fundamentals are strong and I believe we have some time left due to continued economic growth.”