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