Commercial Real Estate Stays Attractive but Residential Market Heads Toward Further Decline, Says Latest Deloitte Report
- Jan 24, 2008
By Anuradha Kher, Online News EditorNew York–While the credit crunch and economic uncertainty have caused investor anxiety and tighter lending standards, commercial real estate remains comparatively attractive with solid fundamentals, plentiful capital and steady allocations, according to Deloitte LLP’s 2008 Real Estate Capital Markets Top Ten Issues Report, released this week. “In prior boom cycles, commercial real estate has responded by overbuilding,” says Dennis Yeskey, national director of Deloitte Consulting LLP’s real estate capital markets practice. “The industry has clearly learned its lesson because this time, commercial real estate is enduring a credit crunch—not a crisis—partially because it resisted this urge, says Yeskey. The overall industry is in a strong position to withstand a recession, should one occur, and commercial real estate remains a viable investment option for those seeking to diversify and insulate their portfolios from market volatility, according to Yeskey. “Capital flow will return in 2008, with the exception of highly leveraged deals and new opportunities are being sought in distressed debt funds, niche opportunities, and global markets,” he says.Institutional investors remain interested in commercial real estate and allocations haven’t been curtailed. “In fact, the U.S. market has become increasingly more attractive to foreign investors,” says Dorothy Alpert, national leader for Deloitte’s real estate practice. “U.S. commercial real estate had become expensive, but due to the weak U.S. dollar, it’s relatively attractive compared to other international markets,” she says. The Deloitte Report highlighted the following:• Fundamentals for multifamily remain mixed, and strong for office and industrial property.• In markets across the U.S., demand for apartments is stabilizing as the housing downturn intensifies. The vacancy rate decreased to 4.4 percent in the third quarter of 2007.• Multifamily prices have not declined as sharply as office and retail, but rents show a similar increase. Further growth is expected.• Overall vacancies remain stable and rent continues to increase, but with cap rates beginning to increase as spreads narrow, a rent vs. caps inversion may occur in the future.• After 24 consecutive quarters of growth, the U.S. economy is showing signs of fatigue. The housing market contracted at an 11.8 percent annual rate as of the second quarter of 2007.