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Don't Just Take Our Word for It, Upside to CRE Market Has Begun

Global CRE Advisors Point Out What They Like about U.S. CRE Markets
June 22, 2011
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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.


  • Maximus Advisors is an affiliated research provider of CW Financial Services, a vertically integrated commercial real estate debt platform.

    Fannie Mae: Multifamily Demand/Supply Imbalance


    Overall housing starts are at historic lows and multifamily new construction is no exception. However, Kim Betancourt, director, multifamily economics and market research for Fannie Mae, says that portends well for the multifamily segment.

    Looking at the construction data, there are less than 230,000 multifamily and condo units under way. As a result, year to date completions through May 2011 totaled just 31,312 units -- well below historic averages.

    "Despite the oversupply of single-family housing, demand for multifamily rentals is outpacing supply quickly in many metros," Betancourt wrote in a commentary this week. "Even at the national level, apartment rental demand has been quite robust, resulting in rising rents and declining concession rates."

    There are an estimated 77,600 apartment and condo units expected to complete in 2012, but beyond that timeframe the number of completions plummet, Betancourt writes that those numbers do not represent enough supply to meet demand.

    With overall multifamily completions abating, developers have taken notice, she writes, noting that in metros such as Washington, DC, there are nearly 11,000 apartment units under way and 16,000 units under way in New York.

    RREEF: U.S. Property Selection Should Be Overweighted to Industrial, Retail



    Real estate fundamentals are improving globally and, with only a few exceptions, all property types and regions are in recovery, according to RREEF Global Real Estate Investment's latest outlook.

    The United States will continue to produce appealing risk-adjusted opportunities in the near term and benefit from having a deeper investable universe, RREEF said. In addition to office and shopping center properties, institutional investors can invest in the industrial warehouse, R&D space and multifamily sectors in the United States.

    The United States real estate market is among the most transparent and liquid in the world. This is especially true for tier one markets, where international investors are most likely to place capital, RREEF said. Within the U.S., property type selection should have an overweight to industrial and retail properties and underweight to the apartment and office sectors relative to the NCREIF Property Index and a moderate overweight to the East and West regions with corresponding underweight to the Midwest and South.

    Coastal, supply constrained, markets tend to have higher volatility than those in the interior, but will also tend to outperform during the next five years, RREEF said. It will be longer before meaningful amounts of construction commence in the supply-constrained markets and so vacancy will be able to compress further in these markets.

    Seattle and Miami-Ft Lauderdale retail will outperform, with lower volatility. Office space in San Francisco, New York and Boston will also likely outperform, as will industrial space in Los Angeles, New York and Seattle.

    Keep up weekly on national news, trends and property leads with the Watch List Newsletter, a weekly pdf that includes other news and leads not found on the CoStar Group web news pages. Sign up for the Watch List E-Mail Alert. A new issue is published late each Wednesday.

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