Archive for category In the News

by Mark Heschmeyer for CoStar Group

Global CRE Advisors Point Out What They Like about U.S. CRE Markets

What better time than the summer solstice to shine a light on current commercial real estate market conditions. CRE firms and organizations released a broad array of mid-year market overviews and viewpoints this past week – all of which cast conditions with a fairly sunny outlook.

We report on the views presented by four respected analysts, including Credit Suisse, which is telling global investors to follow other world currencies flowing to the United States. Also, Maximus Advisors and Fannie Mae both say the U.S. multifamily market is poised for a four-year upswing. And RREEF Global Real Estate Investment says U.S. investors would do well to look closely at the industrial and retail property sectors.

We’ve summarized their reports below.

Credit Suisse: Follow the Money

After suffering through the credit crisis, commercial real estate macro indicators are beginning to show signs of improvement, according a paper from the Customized Funds Investment Group (CFIG) of Credit Suisse’s Asset Management division.

Entitled, “Commercial Real Estate: Has the Tide Turned?” authors Kelly Williams, head of CFIG, Nadim Barakat, CIO of CFIG, and Peter Braffman, a partner on the CFIG Real Estate team, discuss the sector’s uneven global recovery, and how the U.S. commercial real estate market may well provide the most compelling opportunities in the first phase of the recovery.

“We believe that the U.S. commercial real estate market will likely provide the most compelling opportunities in the first phase of the recovery,” the authors write.

This is a result of:

• Stabilizing debt markets and the re-emergence of commercial mortgage-backed securities (CMBS) issuance;
• Property demand improvements, as shown in vacancy and absorption trends;
• Favorable commercial property valuations;
• Macro-economic tailwinds; and
• Significant level of capital ready to be deployed for U.S. real estate.

“Many of the world’s largest investment firms, institutional investors and pension plans have been increasing allocations to this asset class. Starting in 2009 and throughout 2010, institutional capital poured into core and stabilized real estate in primary U.S. market regions in search of reliable, long-term yield,” the authors write. “Public pension plans, such as California Public Employees’ Retirement System (CalPERS), have been restructuring their real estate initiatives to include a greater allocation to core commercial property.”

“This investment activity has led to a meaningful recovery for these properties as yields re-approached pre-financial crisis levels,” the authors write. “The growing liquidity has also made possible the re-opening of the initial public offering market for real estate ventures.”

Of note, the authors point out that Archstone, one of the largest real estate firms focused on the development and management of multifamily (apartment) properties, has been exploring the possibility of a $5 billion IPO, which would be the largest real estate IPO in history.

Low interest rates in the U.S. have also been instrumental in containing the cost of capital for real estate investors and making property returns attractive in comparison to other asset classes, such as fixed-income instruments.

The authors say that investors may be able to take advantage of the changing real estate conditions in the U.S. by considering a number of specific strategies, including income-generating value-added commercial property, opportunistic distressed commercial property and certain other niche income-generating real estate such as senior housing, student housing, medical offices and self-storage.

Despite compelling opportunities, the paper also addresses the risks associated with the commercial real estate market and how investors should consider developing real estate investments in the context of their aggregate portfolio.

Maximus Advisors: 4 Years of Improving Multifamily Conditions Coming

As the U.S. economic recovery gathers sustained momentum and spending returns to pre-recession levels, fundamental shifts in consumer behavior are expected to have lasting effects on numerous real estate sectors, according to the latest national economic and property ratings report by real estate research and consulting firm Maximus Advisors.

“As we have previously predicted, the U.S. apartment market has been recovering at an astounding pace,” said Dr. Peter Muoio, senior principal of Maximus Advisors. “The sector will continue to benefit from the growing preference for renting over homeownership as well as rapid growth of the young adult population. We predict that vacancies will continue to decline while effective rents grow robustly during the next two years due to limited development of new multifamily properties during the recession.”

Key findings from the report include:

• The apartment market will continue to improve over the next four years as renting remains more attractive than homeownership and there is little in the pipeline in terms of new construction.
• The office/commercial market recovery has begun as supply and demand have crossed over. Office absorption has been positive for the past two quarters, driven by gains in office employment. However, further labor market weakness could inhibit recovery in the office segment in the short-term. According to Muoio, the market has bottomed and will see vacancies decline more rapidly in 2013 and 2014.
• Retail real estate stands to benefit from consumer spending stabilization, though higher gasoline prices this summer will inhibit this trend. Additionally, the rise of online retailing will apply downward pressure on in-store demand, further threatening the retail segment.
• The industrial segment is bottoming but demand appears to be picking up as industrial output continues to rise and exports are at all-time highs.

by Randyl Drummer for CoStar.com

With Washington facing a showdown in less than two months for reaching a deal on the government’s debt ceiling, many observers are weighing the potential impact on the commercial real estate recovery depending on various scenarios the Congress may pursue in dealing with this matter.

On May 16, the U.S. government smashed through the $14.29 trillion statutory limit that the government could borrow to finance obligations such as Medicare, Social Security, military salaries and interest on the national debt. The Treasury Department is using what Secretary Timothy Geithner called “extraordinary measures” to keep the government afloat until Aug. 2, at which point the nation will exhaust its borrowing authority and default on its debt obligations.

On April 18, Standard & Poor’s downgraded its outlook on U.S. debt from stable to negative, meaning that if fiscal deterioration is not reversed, the nation’s current stellar AAA rating will be downgraded. Soon after the House of Representatives last week rejected a measure to raise the ceiling, prolonging a budget standoff between Democrats and Republicans, Moody’s Investors Service also warned that the U.S. government’s top credit rating could be in jeopardy.

If there’s no progress on increasing the statutory debt limit in coming weeks, Moody’s expects to place the U.S.’s rating under review for possible downgrade due to the “very small but rising risk of a short-lived default,” the rating firm said.

Although Moody’s fully expected political wrangling prior to an increase in the statutory debt limit, the degree of entrenchment into conflicting positions has exceeded expectations, the firm said. “The heightened polarization over the debt limit has increased the odds of a short-lived default.”

“The real question commercial real estate should be asking is how large the budget cuts will need to be to get Republicans to buy into raising the debt ceiling, and what impact those budget cuts will have on GDP. Commercial real estate demand is correlated with GDP,” observed Chris Macke, senior real estate strategist for CoStar Group.

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by Mark Heschmeyer for CoStar.com

Buoyed by positive same-store sales and solid optimism among restaurant operators for continued growth, the outlook for the restaurant industry remained positive in April.

The National Restaurant Association’s Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 100.9 in April, essentially unchanged from a level of 101.0 in March. In addition, April represented the fifth consecutive month in which the RPI stood above 100, which signifies expansion in the index of key industry indicators. 

“The restaurant industry continued to build momentum in April, with restaurant operators reporting positive same-store sales and customer traffic levels for the sixth time in the last eight months,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “Barring any significant external shocks, restaurant sales and traffic levels will continue to improve in the months ahead.” 

Restaurant operators continued to report net positive same-store sales results in April. 50% of restaurant operators reported a same-store sales gain between April 2010 and April 2011, down slightly from 52% of operators who reported higher same-store sales in March. In comparison, 31% of operators reported a same-store sales decline in April, matching the proportion of operators who reported lower sales in March.

Restaurant operators also reported a net increase in customer traffic in April, although levels were somewhat softer than the March results. 38% of restaurant operators reported an increase in customer traffic between April 2010 and April 2011, down from 45% of operators who reported higher traffic in March. In comparison, 35% of operators reported a traffic decline in April, up from 32% in March.

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