Valuation scores rise sharply, but there is more to come

Our commercial property valuation scores rose sharply in Q1, suggesting that Q3 2022 was a trough in valuations. Office and retail sectors now look fairly valued. While we think retail values do not have much further to fall, concerns about the outlook for offices mean that sector remains far from attractive, even at current valuations. While industrial and apartments still look overvalued, further rises in yields will help both close the gap over the course of the year. At the metro level, offices in major markets such as NYC and San Francisco look fairly valued, but our view remains that NOI prospects in these metros are amongst the weakest. Apartments in NYC now also look close to fair value, but when coupled with the rental outlook, valuations in Atlanta and Dallas potentially stack up better.