October 14, 2013 - Post No. 31 – Everyone has probably heard many investment rules. Buy low, sell high. Buy when everyone else is selling and sell when everyone else is buying.
Although everyone knows they should that, the vast majority do just the opposite. It is the ‘smart money’ that actually follows those rules. They buy assets when the public is dumping them. They sell assets when the public can’t buy enough of them.
Sam Zell is a classic example of this. He bought office buildings in the early 1990’s at 50% of cost new. He sold his REIT in 2007 at the top. Remember that, the next time you consider buying a REIT that is having an IPO.
We are at one of those extreme sentiment moments in time. According to the Second Quarter 2013 Commercial Real Estate Investment Outlook, “The NREI/Marcus & Millichap Investor Sentiment Index reached a new record high climbing from a mark of 174 in the first quarter of 2013 to 180 in the second quarter—the highest level since the index launched in 2004. The current reading also is nearly double the mark of 91 that was achieved at the low point of the Great Recession in 2009.”
The Moody’s/RCA Commercial Property Price Index (CPPI) bottomed in the 4th Quarter of 2009 at 104. This was around the time investor sentiment was at its most bearish. As has been typical for tops and bottoms of all kinds of markets, investors were least likely to buy at the very time they should have been loading up on CRE investments.
Four years later, investor sentiment is at record highs. The CPPI is at 145 – about 40% above its 2009 low. Investors cannot buy enough CRE at these levels. What they wouldn’t touch at prices 40% lower now they stumble over each other to pay the highest price.
Although, I haven’t seen a hint of weakness in the CPPI (the United Kingdom index has turned down this year, but not the USA index), I know it is more likely we are nearer to a top in prices than a bottom. A few years from now I would expect the CPPI to be at this level or lower. Like last week’s post on home prices, we will look back in a few years and see how this turns out.
I will be in San Francisco next week at the National Conference of the Counselors of Real Estate to pick up my Certificate and meet a lot of new CREs. My next post will be October 28th – Halloween Week:)
Happy Columbus Day!
George R. Mann, CRE, FRICS, MAI
"The postings on this site are my own and do not necessarily reflect the views of Situs."