Commercial Property Returns Expected to Grow by 2011
Check out the Tej Kohli’s updates on a recent report by the research arm of CB Richard Ellis Group, CBRE Econometric Advisors (CBRE-EA), which says that the US commercial real estate investors may have to wait for another year to see their returns start growing. Read this exclusive report at Tej Kohli Business blog:
According to a report issued by the research arm of real estate services company CB Richards Ellis Group Inc., Commercial real estate investors in the US may have to wait until next year to see begin to grow, since returns are likely to remain negative this year.
“The worst is behind us because (values) won’t be dropping as fast” told Serguei Chervachidze,CBRE Econometric Advisor in statement to a news agency. “That translates into total returns as well. The greatest declines probably occurred in the third-quarter 2009, although fourth-quarter returns are not yet available.”
This forecast was based on the NCREIF Property Index, which calculates total rates of quarterly returns formed on a huge pool of commercial property owned by private investors.
Hitherto, total returns, net operating income plus the value change of a property portfolio over a year, have dropped by two figures, since it reached peak in 2007 end.
Since then, the total returns have fallen 23 percent for the US office properties and 21 percent for the warehouse and distribution centers. Retail property returns fell 15 percent until now, while the apartment building returns are almost 23 percent down - as reported in the NCREIF Index.
Using the index’s findings, CBRE -EA concluded that returns, in the most likely circumstances, should remain negative all through 2010 and may take 3-10 percent positive upswing in 2011.
The report sees values eventually depreciating 30 percent to 53 percent from its highest in Oct-Dec 2007. Following the slump from that time, values have come down to about 1/3 to 1/2 now.
Cap rates, which are inversely proportional to the prices, are predicted to increase another 0.6 to 1 percent by mid 2011, according to the CBRE-EA base-case forecast. Presently that cap rates for office property are approx 6.3 percent, for warehouse and distribution centers 6.96 percent, for retails properties 6.54 percent and for apartment buildings 5.39 percent.
The report forecasts cap rates gradually dropping, in other words, values gradually increasing to 2005 and 2006 levels by 2012.
“If this forecast is to be believed, commercial investors certainly don’t have a reason to rejoice anytime soon”, said Mr. Tej Kohli.