US commercial real estate slump predicted for later in year as foreign property buyers hover
|Wednesday, 04 August 2010|
Commercial real estate purchases in the US may slump later this year as prices rise and lenders require buyers to put more cash into deals, it is claimed.
A double dip in the commercial real estate market may come as soon as September, according to Joe Cosenza vice chairman of the Inland Real Estate Group.
He believes that banks will reduce the share of debt they contribute to purchases and that is going to back up a lot of deals.
Commercial real estate sales fell 67% to $44 billion in 2009 from a year earlier, according to New York based real estate research company Real Capital Analytics.
Sales rebounded 58% to $34.2 billion in the first half of 2010 compared with the year earlier period, according to preliminary figures from Real Capital.
But cap rates for commercial real estate are at 7 to 7.5%, down from 9.5 to 10% in the first five months of 2009. ‘I haven’t seen cap rates that high for years, maybe dating back to 1999. Most people were frozen in their tracks and sat on their hands. It was an opportunity you should never miss,’ said Cosenza.
He is predicting that cap rates may settle in at 7.5 to 8.25% later this year. ‘At those rates I would buy as much as I could get my hands on,’ he said.
A slump in values would entice more foreign investors. Major players are already showing a great deal of interest in the US commercial market.
China’s $300 billion sovereign wealth fund is reported to be in advanced talks with Harvard University'’ endowment to buy its stakes in half a dozen US focused real estate funds for about $500 million With more capital available than any other investor in the world, CIC has increased the proportion of assets allocated to higher risk assets.
The move contrasts with the retreat from commercial real estate by many American institutional investors, like Harvard, that are struggling with large investments made in the sector during the boom years.
Other foreign investors are also looking to take advantage of low values in U S real estate. In the second quarter, investors from Canada, South Korea, the Netherlands, Kuwait and other countries acquired about $2.2 billion of skyscrapers and other properties in the US, more than five times the amount seen a year earlier, according to research firm Real Capital Analytics.
For instance, a group of investors, including Korean Federation of Community Credit Cooperatives, paid $333 million for a 655,398 square foot, fully leased office building in San Francisco. In another large deal, CPP Investment Board, which invests on behalf of the Canadian Pension Plan, paid $576 million for a 45% interest in the 1.6 million square foot McGraw-Hill Building in Manhattan.
US commercial real estate values remain 41% below their October 2007 peak and only slightly above the low hit in October 2009, according to Moody’s Investors Service.
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