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Commercial Real Estate Prices Kept Rising In 2018 Despite Headwinds

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Commercial real estate values continued to increase across all property types despite anxiety seeping into the environment regarding rising interest rates.

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Commercial real estate prices rose across the board by 7% in November compared to the same period last year, according to Real Capital Analytics' Commercial Price Property Index report. Every sector reported increases in price, with industrial, retail and urban core office product seeing accelerated growth in the past three months.

As has been the case for the past couple of years, multifamily was the fastest-growing sector in commercial real estate at 9% year over year, though that number is smaller than it was in the first half of 2018. Suburban office also reported 9% price growth, which is a considerable acceleration from the 4.6% in growth RCA recorded at the beginning of this year.

Transaction volume did slow from October to November, but RCA reports that overall volume in 2018 is on pace to surpass the previous year. Though industrial and retail real estate are often perceived as heading in opposite directions, both sectors are on pace to see 20% more deal velocity in 2018 than 2017. Hotel properties are 40% ahead of last year's pace, while office is the only sector projected to finish with fewer transactions this year.

The year-over-year increase in both pricing and deal velocity reflects an industry eager to deploy its capital in the face of rising interest rates that have driven down yields. Combined with the sheer length of the cycle, it is enough to make everyone in commercial real estate wonder about when this cycle will end, and what form that end will take.

Over the past year, an increasing number of private debt funds have entered the lending space, making the debt market more competitive than it has been since the Great Recession. While some worry that the combination of debt competition and rising interest rates could be catastrophic, others have already become more conservative with their capital market behavior. Yet Real Capital Analytics' report suggests that the majority of players remain confident.