Chart of the week

Low rates, solid fundamentals continue to support commercial real estate

How healthy is the commercial real estate debt market? This week’s chart looks at why it may be an attractive opportunity for investors seeking income in 2020.

January 17, 2020 | 1 minute read
  • The commercial real estate (CRE) market heads into the new year looking like a mirror image of the broader economy – still healthy but moderating, with wider dispersion between sectors becoming apparent.
  • CRE property prices continue to grow at a solid clip, with price growth having accelerated somewhat during Q4 2019. While there is unlikely to be an extended bounce in price growth, it is a welcome sign that property demand remains steady despite a growing performance spread between sectors, with industrial leading the way and retail lagging.
  • Meanwhile, metrics on the debt side of the ledger paint a picture of a market that is functioning exceptionally well but not overheated. Lower interest rates have helped keep debt financing attractive, and banks reported improving demand for CRE loans late last year.
  • Loan-to-value (LTV) ratios continue to be relatively conservative (currently 62%) and slightly below the long-term average of 64%.1 As the chart highlights, debt-service coverage also remains a bright spot at nearly 2.0x, comfortably above its level one year ago.1
  • With credit market yields hovering near multi-year lows and equity markets at new all-time highs, the U.S. CRE debt market, backed by a solid fundamental picture, may present an attractive opportunity for investors seeking steady income and growth potential in the new year.

  • Real Capital Analytics, as of October 2019 (latest data available).

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