Experts cautiously optimistic about CRE investment market

Real Estate Weekly,  Oct 17, 2007  

• E-mail
• Print
• Link

Continued demand for apartments and hotel rooms made the apartment and hospitality sectors the leading choice for investors in mid 2007, reports the Third Quarter 2007 RERC/CCIM Investment Trends Quarterly, a national analysis of commercial real estate.

The apartment sector earned a 6.8 investment conditions rating, the highest among the five major property types, for the three-month period ending in June, while hotels were not far behind, garnering a 6.7 rating.

Ratings for both property types dipped slightly from the previous reporting period, a reflection of concern among investors about overpricing and capitalization rate compression within commercial real estate. Apartments have led all property types in terms of investment conditions since Fourth Quarter 2006.

(Investment conditions ratings--a scale of 1 to 10, with 10 being the highest--reflect CCIM Institute members' and other expert views of the investment environment and take into account supply and demand, economic conditions, pricing, rental rates and other factors.)

"The demand for apartment units is likely to increase as the housing market cools and subprime mortgage defaults continue," the report stated. "This will help to increase apartment fundamentals, thus strengthening the sector."

Apartment properties also captured a 6.2 return versus risk rating and 4.8 value versus inflation rating, both high measure marks for the quarter.

Investor confidence in hotel properties primarily was based on two factors: jumps in average occupancy rates and revenue per available room (RevPAR), up 1.7% and 7.7% from a year ago, respectively.Respondents found the top end of the lodging market were the most attractive investments.

"According to some sources, the greatest opportunities in the hotel sector are luxury and upscale properties," the report stated. "This is due to minimal new supply and the significant average daily rate growth and RevPAR exhibited by these properties."

The other major property types--office, retail and industrial--earned lower scores when compared to the previous three-month period. The office sector received a 6.0 investment conditions rating, the lowest tracked in Second Quarter, and the lowest risk versus return rating. Respondents noted that "downtown office properties in particular are struggling, as demand has fallen drastically."

The investment conditions rating for retail and industrial properties were 6.5 and 6.4, respectively, both lower than their First Quarter rating.

When analyzing all property types, three leading indicators reflected declines. The return versus risk rating dropped to 5.8 from 6.2, the value versus price rating fell to 4.8 from 5.3, and the inflation versus value dipped to 4.6 from 4.8.

Still, the authors of the RERC/CCIM Investment Trends Quarterly offered optimism tempered with caution:

"Although there are signs of credit tightening, RERC expects the flow of capital into the commercial real estate market to continue for the near-term, especially with the private equity sector continuing to make big plays within the market," the report stated.

"However, the trend of increasing prices cannot continue. Capitalization rate compression may be well ahead of fundamentals, and may have led to some overvaluing of assets in some sectors and markets."

COPYRIGHT 2007 Hagedorn Publication
COPYRIGHT 2008 Gale, Cengage Learning