Don’t Be Fooled By Commercial Real Estate Prices

logo2 cropped high resPricing commercial real estate is vastly different from other assets, such as stocks and bonds where thousands of buyers and sellers state openly their best price and recent transactions are known by all. In fact, commercial real estate pricing is far from a highly competitive industry which must have transparency and all participants have easy access to information.

In commercial real estate, money is made when one party has superior information, meaning the other party has inferior information. Ironically, both parties feel their idea of price and value is accurate or a transaction would never take place. This article unveils recent prices of all 8 categories of commercial real estate in the New Orleans MSA and provides a math lesson showing how price is not affected by supply. Knowing current prices provides you with information that most commercial real estate participants don’t have, and knowledge can help you make better real estate decisions.

Size of the Commercial Real Estate Market in the New Orleans Metropolitan Statistical Area

market summary

The commercial real estate market in New Orleans includes 8.2 million SF for sale and 8.5 million SF for lease, but the largest category is 366 million SF of land for sale.

Average Prices For The 8 Major Sectors of Commercial Real Estate

market statistics
The Industrial and Office sectors have about 5 million SF available, the Retail sector around 3 million, not including 1 million SF of Shopping Centers, Apartments around 200,000 SF and the smallest sector is Hotels with around 100,000 SF available.

Office Market

Zeroing in on the 1,024 property Office sector, there are 142 properties for sale averaging $101 per square foot and 882 for lease averaging $17.35 PSF and on the market for 138 days, down 38 percent from the 12 month average of 223 days. During July 2016, 29 office properties were leased and 3 sold.

Office Sector Lease and Sale Prices With Days On The Market Comparing July With 3 Month and 12 Month Averages

office sector table

 

Cause and Effect: Days On The Market and Lease Price

office DOM
The chart comparing days on the market to lease price doesn’t depict any correlation, but both are indicators of a strong office market resulting in the highest lease prices in 24 months and properties being leased the fastest since 2014, back when Ebola was a problem and the Iphone 6 was announced.

Industrial Sector

The 5.6 million SF Industrial sector has only 273 properties, with 192 for lease averaging $4.60 per square foot and 81 for sale averaging $69 PSF and on the market for 259 days, down 28 percent from the 12 month average of 364 days. During July 2016, 7 properties were leased and 2 sold.

industrial summary

Comparison of Industrial SF For Sale and For Lease

While the Industrial square footage over the last 12 months has ranged between 2.5-3.0 million SF, going back to early 2014 shows how the Industrial sector has tripled the square footage coming onto the market for both sale and lease.

chart SF for lease and sale 2014.2016 industrial

 

Comparison of Industrial Lease Price and Square Footage

There does not seem to be a correlation in the Industrial sector between lease price and supply. Since 2014, the supply of SF for lease has increased from around 1 to 2.7 million, but the price has stayed around $5 PSF.

industrial SF vs Price

 

Can Math Prove That Price and Supply (SF) Are Not Related

You can test this mathematically, using a statistical term called Correlation, or how strongly two sets of data are related. Excel makes it easy. Just copy the data below into Excel.

Table of Industrial Prices and Square Feet Last 24 Months

Month Price SF
2014-04 4.60 1,097,714
2014-05 4.74 1,191,966
2014-06 5.13 1,373,344
2014-07 4.76 1,424,003
2014-08 6.28 1,489,141
2014-09 6.52 1,701,071
2014-10 6.79 1,814,324
2014-11 6.54 2,108,881
2014-12 6.97 2,686,484
2015-01 6.44 2,678,266
2015-02 4.65 2,653,680
2015-03 4.38 2,676,633
2015-04 6.20 2,515,386
2015-05 6.32 2,450,285
2015-06 6.72 2,558,397
2015-07 5.38 2,693,481
2015-08 4.68 2,799,854
2015-09 10.60 2,697,487
2015-10 4.86 2,887,840
2015-11 4.06 2,951,164
2015-12 3.58 3,027,771
2016-01 6.88 2,882,150
2016-02 7.10 2,844,831
2016-03 5.93 2,244,517
2016-04 2.23 2,377,821
2016-05 4.93 2,358,527
2016-06 9.28 2,525,389
2016-07 4.38 2,406,397

 

Click tabs formulas, more functions, statistical, then scroll to CORREL. Copy and paste Price cells into array1 and SF cells into array2. The result is .0928 which is 9.28%. That means square footage only explains 9.28% of the change in price. This works for any comparison of data, even temperature versus snowball sales.

Summary

Both the Office and Industrial sector in the New Orleans MSA are experiencing strong markets, where prices hold despite an increase in supply. Prices for the most active sectors are:

  • Office-$17.06 PSF
  • Industrial-$5.75 PSF
  • Retail-$14.16 PSF
  • Shopping Centers-$13.26 PSF

For more information on how to value commercial real estate, read our article, How To Value Commercial Property Using Cap Rate.


For a free market valuation of any commercial property, just call or email our office.

 

Robert Hand, MBA, CCIM, SIOR

Louisiana Commercial Realty, LLC

One Lakeway Center

3900 North Causeway Boulevard-Suite 1200

Metairie, Louisiana  70002

Phone: 504-289-8172

 

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