Outlook For Commerical Real Estate Market Sours
Wavering confidence in the national economy and fluctuating capital markets have created a "wait and see" investment climate for commercial real estate, according to a new report.
Wavering confidence in the national economy and fluctuating capital markets have created a "wait and see" investment climate for commercial real estate, according to a new report.
According to the Fourth Quarter 2007 RERC/CCIMInvestment Trends Quarterly, a national analysis of commercial real estate, commercial professionals have soured on the economy's prospects. A survey of commercial professionals rated the U.S. economy in the July-to-September reporting period at 5.4 on a 10-point scale, down from the 6.0 rating of the previous quarter.
Investment conditions ratings declined or remained flat for all property types, except the apartment sector, and the overall return versus risk condition for the commercial real estate market dipped slightly to 5.6 from 5.8 in Second Quarter, according to the report.
"Due to the complex financial structures associated with lending, commercial real estate -- which ironically was once known for its transparency -- is adding to the sense of uncertainty," the report stated. "We don't know what we will find under the next rock, but the effects of the capital market volatility on commercial real estate likely will be felt for some time to come."
"For many, it is time to hunker down and prepare for whatever lies ahead," the report added.
Ratings from the report -- a scale of 1 to 10, with 10 being the highest -- reflect CCIM Institute members and other expert views of the overall commercial real estate market, specific property types and geographic
regions, and take into account supply and demand, economic conditions,pricing, rental rates and other factors.
With an overall investment conditions rating of 6.9, the apartment sector remained the top rated commercial property investment, as it has for the past four quarters. The report cited the cooling housing market, failure of subprime loans and projected rise in rental rates as factors behind this sector's continued favor among investors.
As in Second Quarter, hotels ranked second with an investment conditions rating of 6.6, yet it dipped slightly from the previous 6.7 rating. The price-weighted average price per unit for hotels declined 4.4 percent, and the median price per unit dropped 2.1 percent. Some survey respondents noted that relatively high occupancy and room rates will keep hospitality properties among the better investment types.
Investors continued to give low marks for the other major property types office, retail and industrial. The investment conditions rating for offices again ranked among the lowest at 6.1, but a slight increase from the 6.0 rating in the previous quarter. Retail and industrial properties were 6.3 and 6.1,
respectively, both lower than their Second Quarter rating.
When analyzing the economies of the various geographic regions, the East topped the list with a 7.3 rating. Respondents were bullish on the future, predicting an even stronger economy in 2008. The West ranked second at 6.4 thanks to a generally stable economy and a vibrant apartment market. The South regional economy earned a 6.3 rating, with respondents stating that industrial properties offer the best investment opportunities due to low supply and high demand. In the Midwest, which earned a 5.8 economic rating, apartments ranked on top and retail was the least promising investment type.
Transaction data in the Fourth Quarter RERC/CCIM Investment Trends Quarterly was based on the 12-month period ending Sept. 30. The sales data were provided by CCIM members, RERC contacts in the market place, and gathered through public information sources.
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