Deloitte Exec Acknowledges Credit Squeeze has Led to Decline in Valuations

By Keat Foong, Exective Editor New York, N.Y.—Deloitte’s analysis of the commercial real estate market at this point in time still yields a positive picture. In Real Estate Capital Markets Top 10 Issues—2008 Report released earlier this year, Deloitte LLP acknowledged the credit crunch and economic uncertainty, but said that commercial real estate remains relatively attractive as an investment. Fundamentals remain solid, capital is still plentiful and allocations are steady, says the report. Dennis Yeskey, of Deloitte’s real estate capital markets practice, says that the commercial real estate industry is not suffering like it was in previous industry cycles. “We are not falling apart and busting. We are giving back a little, but nowhere near other industries,” he tells MHN. Yeskey says values have backed up and cap rates have increased in the commercial real estate sector, but “not radically.” But he acknowledges that the credit squeeze has led to a decline in valuations—by possibly as much as 10 to 15 percent—as well as a significant curtailment in the volume of transactions. In fact, Yeskey tells MHN that transactional volume has dropped off so markedly since September that it is difficult to measure by how much asset valuations have come down. “There isn’t enough real life transaction flow to guess what the decline might be,” he says.   Yeskey says the multifamily sector is one of the stronger commercial real estate sectors. “Our clients in that sector are doing very nicely.” He says returns in the sector, which is driven by job growth and wage increases, has never been as high as those in other sectors, but they are more stable. Deloitte’s report provides insight into commercial real estate market trends over the short and long term, through a review of critical issues, an examination of the industry’s core fundamentals, and an analysis of underlying factors. Findings from the report include:–Continuing a decade of positive growth, public and private commercial real estate returns, excluding public REITs, outperformed the volatile equity market in 2007 – but returns in the high teens for 2008 may be unrealistic due to tightening credit and economic uneasiness–Despite stable commercial real estate product fundamentals, the credit crunch has spilled into the CMBS and CDO markets affecting the global debt and equity markets, which – when coupled with investor losses, related bankruptcies, the U.S. economic slowdown, and rating agency concern – resulted in an increase in debt capital costs and an overall re-pricing of commercial real estate debt. –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 Q2 2007 and stock market volatility shook confidence. –While residential real estate and commercial real estate are fundamentally different and heading in opposite directions, lenders are now bringing much needed scrutiny to commercial underwriting.– 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.This is Deloitte’s 10th Real Estate Capital Markets Top 10 Issues Report. A copy of the report is available on Deloitte’s website at