Although prices are up over the past two years, rents in most US commercial real estate markets are lagging. ‘I think we’ve bottomed, and we’re going in an upward trend,’ said Michael Fascitelli, chief executive officer of Vornado Realty Trust speaking at a real estate event hosted by De La Salle Academy in Manhattan, New York.
‘The question is what’s the slope of that line going upward? The pricing is indicating a much more robust recovery in three to five years than I think we might have,’ he added.
Since hitting lows in the middle of 2009, US commercial property prices are up 33% but still off 18% from their peak in 2007, according to the Green Street Advisors Commercial Property Price Index.
Vornado chiefly owns office and retail properties in key US markets, with most of the properties located in Manhattan and in the Washington, D.C. area. Those markets have been the primary beneficiaries of federal spending, either from the bailouts of Wall Street or the expansion of the federal government.
But elsewhere the US commercial real estate market has been sluggish, mirroring job growth. Interest rates still pose a risk for US commercial real estate, whose sales depend on using a great deal of borrowed money, Fascitelli said.
Low rates have helped owners hang on to their properties and have lifted prices by keeping borrowing costs low. The lower the borrowing costs, generally, the higher prices rise.
But it is unlikely interest rates will fall further, so real estate values will have to depend on income the properties generate from rent.
‘I worry about rates spiking up without inflation in assets. You have to make the money by income going up. The risk is that you do OK on the front rentals for a while, but interest rate rises take all the juice away,’ he added.
