Focus on Investment Conditions: Commercial Real Estate Keeps Its Healthy Pace

By Riggs, Kenneth P. | Real Estate Issues, Fall 2005 | Go to article overview

Focus on Investment Conditions: Commercial Real Estate Keeps Its Healthy Pace


Riggs, Kenneth P., Real Estate Issues


ALTHOUGH MANY SIT ON THE EDGE OF THEIR SEAT as commercial real estate continues to provide relatively strong and solid returns, commercial real estate as an investment class is being viewed in a new light and is considered to be an increasingly important asset in the financial world.

[ILLUSTRATION OMITTED]

Buoyed by low interest rates during the last few years, we watched as record-level home sales and new construction, along with loan refinancing, helped pull the U.S. out of a recession. GDP grew, employment grew, and as a result, in 2004, soaring home values and rising stock prices drove the wealth of American households up by 9% to a record $49 trillion, states the Federal Reserve.

With consumers spending even more and businesses growing and finally beginning to occupy more space, record levels of capital flowed to the commercial mortgage markets in 2004. In fact, real estate was among the biggest mutual fund winners in 2004, earning 32% returns on average for the year. This was the fifth consecutive year that public real estate investment trusts (REITs) outperformed the major stock market indices, reported Lipper.

Although private real estate returns are decreasing, real estate returns overall remain less volatile than stocks, and as shown in Table 1, are outperforming those for other investment classes. As such, demand for real estate remains high, with pension funds, endowments, foundations, and individual investors boosting their investment in commercial real estate.

COMMERCIAL MARKETS REFLECT BUSINESS AND CONSUMER TRENDS

The Federal Reserve indicates that it will continue to raise the federal funds rate and to monitor the rate of inflation. The fear is that an increase in interest rates and inflation, along with high fuel rates and a slowdown in consumer confidence, will slow consumer and business spending, and that the real estate recovery--now off to a solid start-will stall. However, real estate's propensity to lag the economy is also one of its most stabilizing features. Since most commercial real estate properties do not move on a moment's notice, there is time for investors to study the fundamentals, evaluate return expectations, and make more informed investment decisions.

One of the most significant findings that Real Estate Research Corporation's (RERC's) second quarter 2005 research indicated was that required pre-tax yield rates and required going-in and terminal capitalization rates continue to decline for all the major property types except hotels. How much more investors will lower their expectations is unknown, but we believe this further decline suggests that the changes in the financial and commercial real estate arenas are increasingly more structural rather than cyclical, and a larger proportion of this downward shift is here for the long term.

WHAT ABOUT RETURNS ON INVESTMENT?

Office Sector -- As for the office sector, RERC's survey respondents indicate that investment conditions have improved quarter by quarter for both CBD and suburban office properties during the last year. Office jobs continue to increase, especially in the financial and services sectors, and little by little, vacancy rates are improving.

As shown in Table 2, NCREIF 1-year returns are averaging above 13% for CBD and suburban properties. However, due to several factors, including high capital expenditures and relatively higher vacancy rates, there is a great deal of uncertainty associated with office investments, which is reflected in the variation in return from this asset. As such, the risk-adjusted returns for the office sector reside in the bottom half of the spectrum. However, what made office properties so risky over the last several years may be investors' biggest ally in generating higher total returns today. Investors are advised to be wary of rising interest rates, as many of our survey respondents believe capitalization rates have bottomed-out, as demonstrated by RERC's relatively high required returns for suburban properties. …

The rest of this article is only available to active members of Questia

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Focus on Investment Conditions: Commercial Real Estate Keeps Its Healthy Pace
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Help
Full screen

matching results for page

    Questia reader help

    How to highlight and cite specific passages

    1. Click or tap the first word you want to select.
    2. Click or tap the last word you want to select, and you’ll see everything in between get selected.
    3. You’ll then get a menu of options like creating a highlight or a citation from that passage of text.

    OK, got it!

    Cited passage

    Style
    Citations are available only to our active members.
    Buy instant access to cite pages or passages in MLA, APA and Chicago citation styles.

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

    "Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

    1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

    Cited passage

    Thanks for trying Questia!

    Please continue trying out our research tools, but please note, full functionality is available only to our active members.

    Your work will be lost once you leave this Web page.

    Buy instant access to save your work.

    Already a member? Log in now.

    Author Advanced search

    Oops!

    An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.