Is Real Estate Overvalued?

May 01, 2015

The core real estate market has enjoyed a solid run over the last five years. However, outsized returns do not last forever and for this reason, investors are starting to question future return prospects for the asset class. There are several metrics to consider when answering such a question and this week’s Chart of the Week looks at one such metric: new supply.

The chart above compares new supply as a percentage of existing stock across the four main property sectors. As the chart indicates, current levels of new supply remain below the pre-recession averages for three out of the four sectors. That affords some comfort. However, new supply of apartment properties has exceeded its pre-recession average. Indeed, a lot of the supply in apartments has been driven by an increase in true rental demand, but the data suggests that the apartment sector may come under pressure in the near- to medium-term if new supply continues to rise. According to this metric, opportunity still remains in the retail, office, and industrial sectors. Ultimately, though, new supply is just one metric to consider when gauging the current state of the real estate market. Other important items to monitor include performance, valuation, debt, income, and capital flows. Our recently released newsletter, The State of Real Estate: Is the Run Over?, analyzes these metrics to formulate a view on future return prospects for the asset class.