Capital Returns on Commercial Real Estate Reach Record Low: IPD

[leistb]

Capital Returns on Commercial Real Estate Reach Record Low: IPD
by JON PRIOR


Friday, February 19th, 2010, 11:56 am

Capital returns on US commercial real estate fell to a record low in 2009, according to the Investment Property Databank (IPD) US Quarterly Property Indicator.


The report monitors the trends in underlying market value and returns of $76.5bn of assets held by real estate funder managers in the US.
Capital returns fell 23.9% in 2009 for a total decline of 33.4% from the peak of real estate values in December 2007. Capitalization rates – or the ratio between the net income from the asset and its original price – sunk another 140 bps over 2009 to 7.1%, the highest level in six years.


Delinquencies on commercial mortgage-backed securities (CMBS) loans reached 5.42% in February, according to Moody’s Investors Service.
The pace of market value decline eased over Q409, but continued capitalization rate pressure and “weakening” rental fundamentals continues to curb the optimism toward 2010 as the year of recovery.


“2010 in many ways is a crunch year for US commercial real estate,” said Simon Fairchild, managing director for North America at IPD. “The ‘extend and pretend’ policies banks adopted last year to stave off loan-to-value covenant breaches may have curbed the tide of rising loan delinquencies in the short-term, but lenders and investors need to always retain a vigilant eye on the health of real estate fundamentals. One focus this year will be to track signs of stress in occupier markets; particularly in cities with rising vacancy rates.”


IPD studied five commercial real estate markets in the US: New York, Washington D.C., Chicago, Los Angeles and San Francisco. Analysts found a divide between the two coasts. New York, Chicago and Washington had smaller market value write-downs than the US market average, but Los Angeles and San Francisco markets fell below that average.





The chart shows annual capital returns from the peak to the trough. San Francisco values declined 4.1% in Q409 and 27.5% over the year, the most of the five cities. Values dropped 39.4% from the peak to the trough. On the other end of the spectrum, Washington values dropped 22.1% over the year and 31.6% overall.


http://www.housingwire.com/2010/02/1...ecord-low-ipd/

[Ought Six]

About the only commercial real estate making money these days is apartments. There is rapidly rising demand for rental housing as foreclosures continue.

[CanadaSue]

and I'm perfectly positioned to watch that at work. My company buys a specific profile of building & most importantly, buys buildings JUST starting to run down in markets where the vacancy rate is low & very little new construction is going on.

I'm learning tons just reading the corporate website - what they don't tell you is easy to read between the lines. As a business they're getting big enough to be cutthroat with contractors. They know when to contract large scale, (parts & cleaning supplies) & when it makes sense to use local talent.

Building budgets are as tight as a second skin but a good manager can make it work after an initial transition period of higher than normal operating costs. I'm having a blast trying to identify areas where money can be saved here. Tough right now with controllables: repair & maintenance but some of the local contracts I may recommend not be renewed next year - better quality of work at equal pricing is available.

I'm reading a ton of reports about the city & neighbourhood. The beauty of living in a major university town is that a lot of scholarly analysis, (still readable), is available on city & neighbourhood trends & demographics. Combine that with some footwork, some hard thinking & practical planning on reapirs, maintanence & 'curb appeal' & WE have room to raise rents.

I'm almost finished my report research - will write that up & submit it this week with recommendations for rent increases on new units. We're prevented from increasing rents on already occupied units any higher than a limit set by the province which reflects the inflation rate. But between now & summer's end, assuming I can whip the current RMs or new ones into keeping the place looking presentable & welcoming, I think I can increase our monthly gross rental income by about 1.5%. If the economy wasn't in a tail spin, I could double that.

ZERO applications for building permits for new rental housing in the city right now & now planned that I can figure out. The room is there for reasonable rent increases & with a year of proper advertising & solid work in the complex we can improve our reputation by a good bit.

It's a fascinating dynamic - juggling the satisfaction of tenants, REIT unit holders & Head Office management. There's an awesome tension to it all & a tremendouos satisfaction in knowing that even at the bottom of the food chain, I can help improve the bottom line, given a bit of time.

Business can be fun - who knew?

I got off track. It's a given in the company that people always need a place to live. We may have a captive audience here with a low vacancy rate but people move to different markets where competition is tougher. We keep them happy here, they'll stay with our offerings elsewhere if they're well priced.

And as the company likes to brag - investors have never lost a cent of original investments & most have enjoyed steady growth - ntohing spectacular, but it's a nice part of a portfolio.

[Fiddlerdave]

It must nice to live in a country with an economy.

The value of housing in some markets in the USA is almost down to the sales price that will allow investors to swoop up the empty houses and start renting them in a big way (the range of 110 to 160 times the monthly rental rate).

The market has a settling time while these new investor home rentals continue to increase the apartment rental rates (along with job loses continuing to force people to double, triple, and quadruple up along with plenty still moving home to mom and dad!)

As far as commercial rental, I am trying to figure a way to get a picture of some of my area's major thoroughfares - the forest of retail, commercial and warehouse "For Lease" signs is dizzying in some areas. Yet the businesses I go to tell me their landlords will not budge on the rate, and several are just going to close because their slow business won't give them enough to pay the lease rates left over from boom times.