Outlook Negative For US Commercial Property Investment In 2010

Commercial property have already fallen over 40% off their peak values of 2007, and it could get even worse. While the market will likely continue sliding in 2010, …

Commercial property have already fallen over 40% off their peak values of 2007, and it could get even worse. While the market will likely continue sliding in 2010, the rate of decline has slowed considerably, and November actually posted a positive price performance. For more on this, see the following article from Property Wire.

US commercial real estate investors may have to wait until next year to see their returns start to grow as they are likely remain to remain in negative territory in 2010, according to analysts.

The greatest declines probably occurred in the third quarter of 2009 although fourth quarter figures are yet to be published, says the latest report from the research arm of real estate services company CB Richard Ellis.

‘The worst is behind us because values won’t be dropping as fast. That translates into total returns as well,’ said Serguei Chervachidze, CBRE Econometric Advisors Capital Markets economist.

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Basing its analysis on the National Council of Real Estate Investment Fiduciaries Property Index, which calculates total rates of quarterly returns based on a very large pool of privately held commercial real estate properties, it says that so far, total returns have fallen by double digits since the peak levels seen near the end of 2007.

For US office properties, total returns have fallen 23%, for warehouse and distribution centers returns have fallen 21%, retail property returns are down 15% and apartment building returns are down 23%, according to the NCREIF index.

Using the index, CBRE-EA said that returns, under its most likely scenario, should remain negative throughout 2010 and turn 3% to 11% positive in 2011. It sees values ultimately falling 30% to 53% from the peak in the last quarter of 2007. Factoring in the slide since then, values are about one-third to halfway there.

However, stronger, positive income returns from rents generated by commercial property should mitigate the property value declines this year, CBRE-EA said.

Capitalization or ‘cap’ rates, which move inversely to prices, are expected to rise another 0.6 to 1% into the middle of 2011, CBRE-EA forecasts. Currently cap rates for office properties are about 6.35%, 6.96% for warehouse and distribution centers, 6.54% for retail properties and 5.39% for apartment buildings. It sees cap rates slowly falling, or values slowing rising, to 2005 and 2006 levels by 2012.

Meanwhile the latest price index from Moody’s shows US commercial property prices increased by 1% in November, the first increase in more than a year.

But the rating agency also warned that expects prices to resume falling in the coming months although declines should be less severe than in the middle of 2009. ‘We anticipate further deterioration in property fundamentals and increases in cap rates. The sector is not yet out of the woods,’ said Nick Levidy, Moody’s managing director, adding that aggregate prices are 43% below their peak values.

This article has been republished from Property Wire. You can also view this article at
Property Wire, an international real estate news site.

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