Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
Issue link: http://cire.epubxp.com/i/102789
As Americans struggle with the realities of a new normal — including slow economic growth, a $16 trillion debt load that has prompted new warnings by the major credit rating agencies, volatility throughout the world, and waning job growth — it is hard not to become discouraged about the state of the national economy and the outlook for all investments. Te Federal Reserve has done nearly everything it can to spur growth, and Chairman Ben Bernanke has announced the Fed will buy $40 billion of mortgagebacked securities every month until the job market improves. But monetary policy alone cannot get the U.S. out of the hole it is in, and no matter how much we polish our looking glass, a new fscal policy is unlikely to appear much diferent from what we have seen in the past. Tom Grill/Corbis Reflections on the Recent Past CCIM.com Looking to the past gives us our best view of what to expect in the future. With respect to the national economy, Real Estate Research Corp. expects to see the sluggishness we have endured for the past several years to continue. Slow economic growth in the neighborhood of 2.0 percent, weak job growth, still-low interest rates, and volatility in the stock market are expected in 2013. Despite lethargic employment growth, the low interest rates in this investment environment continue to favor safe investments, particularly commercial real estate. CCIM members who responded to RERC's 3Q12 Investment Trends Quarterly survey gave commercial real estate their highest investment rating of 6.1 on a scale of 1 to 10, with 10 being high, followed by a rating of 5.4 for stocks, 4.5 for cash, and 4.3 for bonds. Table 1 shows that year-to-date returns for the major stock market indices had increased signifcantly at the end of 3Q12. Although stock market returns continue to fuctuate, overall real estate returns have remained relatively stable. As determined by the National Council of Real Estate Investment Fiduciaries in the NCREIF Property Index, real estate returns will likely remain close to the averages shown. As for the future, the relative safety of commercial real estate as an asset class is likely to continue to be critical for investors in the year ahead. Real estate is tangible and transparent, and it ofers reasonable returns as an investment alternative, particularly in periods of volatility, which we expect as long as the challenges in the national economy continue. We are starting to see required pre-tax yield rates and going-in capitalization rates decline slightly for the ofce, industrial, and neighborhood/community institutional retail markets (see Table 2). However, compared to 10-year Treasuries (see Figures 1 and 2), commercial real estate returns should remain relatively stable. Coming Clean in 2013 For the most part, commercial real estate has come clean: It has been re-priced appropriately and values are reasonable. Commercial property in the primary markets, particularly the coastal markets, is fully priced. In addition, lack of confdence and volatility in the stock markets, low bond yield rates, and low interest rates continue to favor the commercial real estate market as an investment alternative. In addition, most cities and states have made the kinds of adjustments required to get their fscal position in order during the past couple of years. Many regions and markets have successfully set priorities, made difcult but necessary decisions, and balanced their budgets. We saw increasing numbers of commercial property transactions in secondary and tertiary markets throughout 2012. This trend should continue due to the general improvement in regional economies, which has been boosted by local manufacturing, improving job growth, and stabilizing home prices. Further, commercial property re-pricing is taking place in these markets and distress continues to be resolved, which should continue as long as interest rates remain low. CCIM members have also noted the strength in the regional economies compared to the national economy, and rated their regional economies accordingly in 3Q12. Te East regional economy earned the top rating of 6.1 on a scale of 1 to 10, with 10 being high, followed by the West with a rating of 6.0. Te South regional economy was rated at 5.6, and the Midwest at 5.3. In contrast, the national economy was rated at 4.9 during 3Q12. January | February | 2013 27