A New Level of Industry Maturity: Commercial Real Estate Has Earned Its Place in the Pantheon of Stable and Attractive Investment Classes. While a Smaller Market Than Stocks or Bonds, the Real Estate Market Has New Followers

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REAL ESTATE AS AN INVESTMENT CLASS has finally come of age and continues to gain the respect of institutional and retail investors.

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Having earned its place with Main Street investors over the past several years when it was able to provide the stability and transparency found lacking in the stock and bond markets, real estate continues as a viable and attractive investment choice. Capital continues to pour into the real estate market with the size of the U.S. institutional-quality real estate debt and equity markets now at slightly more than $3 trillion. While still relatively small compared with investment in the stock and bond markets ($13 trillion invested in stocks and $20 trillion in bonds), it is quite likely that investors will look to real estate even more during the coming years due to the retiring baby boomers' need for income-oriented returns, real estate's relatively stable yield characteristics and the continuing need for portfolio diversification.

I see the commercial real estate investment market transitioning to a new era of investor respect and a level of maturity previously afforded to the stock and bond markets. This new, more mature market will focus on risk management as a necessary tool for assisting investors in gaining marginally better returns while minimizing their risk exposure.

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Despite real estate's stability and general attractiveness, it is important for lenders and investors to remember that real estate is not immune to the risks and uncertainties that affect the stock and bond markets. Given the present investment environment, Real Estate Research Corporation (RERC), Chicago, has identified several critical areas that lenders must understand and incorporate in their debt strategies, with an ultimate commitment to risk management, in order to be successful.

The economy and its impact on real estate

We have always paid attention to the economy, and the famous 1990s tag line of "It's the economy, stupid!" still resonates with investors. More recently, however, the broad real estate investment market has clearly made the connection that the economic outlook for real estate boils down to "Jobs, jobs, jobs!"

The commercial real estate market has watched the expanding economy generate more than 2 million net new jobs during the last year and a half. However, there are early signs that the employment picture is strained, as difficulties continue in industries such as information and technology. High-tech markets--those his hardest as the fall of the dot-coms ushered in the 2001 recession--continue to reflect weak fundamentals, and have yet to reach their trough employment levels.

A year ago, the economy was poised to come roaring back. Consumer spending remained amazingly resilient, low interest rates continued to provide liquidity to a huge and growing economy, and business spending and investing were finally kicking in. As 2004 got under way, it appeared we were finally hitting on all cylinders, with the economy moving forward. Most important, we were transitioning from a jobless recovery into an economy with a solid overall growth pattern fueled by growth in employment--exactly what was needed to feel confident that a full economic recovery was under way. This was especially critical for the commercial real estate markets that ultimately measure success by filling up space and creating strong earnings for their investors.

Today, the economic landscape has changed. The factors that weigh heavily on the economy--interest rates, inflation, political uncertainty, geopolitical issues and energy prices--are beginning to wear at the optimism of a sustained and even recovery.

The biggest concern of watchful investors rests with slower momentum in household spending, a direct result of higher prices (especially energy prices), rising interest rates and high debt burdens. …