“The Real Estate Capital Markets Outlook for 2008,” to be released on Tuesday, said that while the pace of deals and growth might slow, the industry’s relatively restrained building over the past several years might allow commercial property to continue performing well compared with other investments.
“The message is, don’t panic,” said Dennis Yeskey, national director of Deloitte Consulting LLP’s real estate capital markets group and an author of the report. “Commercial real estate is not the next shoe to drop.”
Since 2003, the U.S. commercial real estate market had been riding a wave of high prices as investors loaded with cheap debt bought shopping centers, apartment houses, distribution centers and office buildings. As interest rates fell, prices soared, and rents in some markets went through the roof.
The current credit crunch has brought an end to that period of historically high availability of cheap commercial mortgage debt, the report said. Commercial real estate has now taken center stage with news that top landlords like Centro Property Group (CNP.AX: Quote, Profile, Research) and Macklowe Properties are struggling to refinance buildings and considering sales.
But Yeskey said that many of the stories receiving attention were about the most highly leveraged deals and not representative of commercial real estate in general.
NOT THE CASE THIS TIME
Commercial property has not remained immune to the turmoil in the capital markets. Values have apparently declined 10 percent to 15 percent, but a scarcity of sales has made it difficult to determine pricing, Yeskey said.
While a U.S. recession could take down commercial real estate performance, the effects would not be as painful as in prior downturns, Yeskey said.
“Every other time we overbuilt, we got caught in a recession,” Yeskey said. “That’s not the case this time.”
New supply remains at manageable levels for most commercial property types, according to the report. While office and industrial vacancies continued to decline into 2008, the retail and apartment segments have had some reversal in vacancy rates, and hotels have sustained minor decreases in occupancy.
Yet there are signs that commercial property market may lose its luster.
Office developers added 19.6 million square feet of new U.S. construction to the market in the fourth quarter, the most in any quarter since 2000, according to real estate research firm Reis. In recent years, that figure has ranged from about 8 million to 12 million.
And Fitch Ratings has forecast that CMBS loan delinquencies are likely to double or triple by the end of 2008, after closing out 2007 at a low of 0.28 percent.
“We’re going to head into lower returns,” Deloitte’s Yeskey said. “But I don’t think it’s time to panic just yet.”