CPE 100 Quarterly Sentiment Survey: A Bubble is Forming, but Status Quo Prevails for Now

According to the midyear CPE 100 Quarterly Sentiment Survey, a bubble is forming in commercial real estate, spearheaded by multi-family demand.

A resurgent investment market is raising an inevitable question: is a bubble forming in commercial real estate? According to the midyear CPE 100 Quarterly Sentiment Survey, the answer is definitely “yes.”

Asked about the likelihood that a bubble would appear in the next 12 months, a solid majority of executives surveyed–62 percent—agreed. The finding is a highlight of the quarterly poll of the CPE 100, a select group of leading commercial real estate executives.

Another response underscores the impression that years of overachievement by multi-family properties may be coming to a close. Half of the executives surveyed half identified the multi-family sector as the asset category where a bubble is most likely to appear. By contrast, only 21 percent named single-family homes as most likely to experience a bubble, followed by hospitality and office properties, each cited by 14 percent.

“The fact that multi-family is being singled out as the asset class most likely to see a bubble is likely due to the fact that the apartment sector has recovered faster, and farther than other property types,” said CPE Senior Associate Editor Mike Ratliff, who coordinates the Sentiment Survey.  “Apartment properties in core markets are selling above peak pre-recession values, though there has been recent deceleration in both rent and occupancy growth. It remains to be seen whether this is a new normal—or whether multi-family buildings are indeed overvalued in markets like New York, San Francisco and Washington, D.C.”

This quarter’s Sentiment Survey also suggests that a reckoning could be in store for several longtime star markets.  Forty-six percent of executives identified Washington, D.C., as the major market that is closest to a pricing pullback. Half as many—23 percent—said that prices are on the verge of a downturn in San Francisco, and 15 percent cited New York City.

On the economic front, the CPE 100 offered a sense of stability mixed with a few caveats. The midyear survey found that 46 percent of executives believe that general business conditions will be at least somewhat better three months from now, nearly identical to the first-quarter total of 50 percent  and an uptick from the 30 percent one year ago. Nevertheless, a note of pessimism also emerged; another 15 percent of executives expect business conditions to worsen during the next three months.

When it comes to the real estate industry itself, most executives anticipate that the status quo will prevail for a while. A majority of executives—about 54 percent—say that the health of the market will be unchanged during the next three months, nearly the same as the 58 percent who said so in the first quarter. The percentage that detects improvement, 38 percent, is slightly smaller than during the first quarter but bigger than the 23 percent who said things were getting better at this time in 2012. Finally, about 8 percent worry that real estate market conditions will worsen during the next three months.

“This month’s results jibed with other statistics indicating a general stabilization—though not an outright improvement—in the real estate market in the face of some continued economic and political uncertainties,” said CPE Editorial Director Suzann Silverman .  “On the other hand, the expectation for a pricing pullback in Washington, D.C., is interesting, given that we have now worked through many of the factors that gave investors pause last year in the nation’s capital.”

Considering the general perceptions of stability, it was somewhat surprising that members of the CPE 100 are more cautious about predicting improvement in their own companies’ performance.  Only 38 percent of respondents were willing to predict that their companies will be doing better in three months, a drop from 58 percent in the first quarter. Accordingly, about 62 percent expect their firms’ performance to maintain the status quo, up from 42 percent in the previous survey.