Commercial realty faces pressure in 2003

Commercial real estate prices are 'pushing the envelope' as anticipated returns continue declining and forecasted demand for space remains sluggish, a new analysis shows.

Investors expect all major property types to produce less return in 2003 than in 2002, according to Real Estate Research Corp. Declines in total return of anywhere from a tenth to a half a percentage point are predicted across nine categories tracked by RERC.

The idea that yields would fall and prices rise even as market fundamentals appear riskier is confusing commercial real estate investors, RERC Chief Executive Ken Riggs said.

'The conundrum is due to extremely low interest rates and the lower performance expectations investors have for alternative investments,' Riggs said.

'This disconnect is generally happening for only the best properties in the best locations,' he said. 'Additionally, the commercial real estate universe is still a small playing field compared to that for stocks and bonds, and it does not take a lot of capital to cause the playing field to get crowded.

'I´m starting to get nervous about current pricing levels for even the best properties, but there still is a healthy level of underwriting rationality. We are clearly pushing the price and expected-return envelope.'

One positive sign from the research: Investors expect to see rental-income growth in all the property sectors -- warehouses, industrial R&D, suburban offices, downtown offices, regional malls, retail power centers, neighborhood/community centers, apartments and hotels. But rising expenses may offset those gains.

(CBS News)

Related News