Financial Instability and The Investment Real Estate market
Recent news articles and reports from national publications have noted the effects of our national financial insecurity on the real estate investment market. This is my accumulated take on these reports.
It seems that as 2007 closed out, pretty much everyone has come to accept that the huge sub prime lending market issue and the housing market that continues to slow with deflating values has caused a definable overall slowing to almost every aspect of the economy.
Locally, the industrial real estate market reached its peak in late 2006 and has slacked off since. The natural timelag between actual market conditions and new inventory coming on line is leaving develoeprs with unoccupied product with more still coming on line in 2008 to further dillute an already overbuilt market in specific submarkets locally. These conditions are not unusual to the national market as well. Therefore, real estate developers and investors are adjusting.
Despite this, most reports continue to indicate relatively solid economic factors. In addition, the weak dollar has strengthened exports and the domino effect rom those added foreign orders in U.S. products. The industrial market, while definately slowed should continue to see an amount of growth.
Also, with the slowing of the absorption rates in industrial, availability is up and landlord concessions are increasing, further encouraging firms that have been on the fence to step up and proceed with their expansions in some cases. This all lends a degree of interest in the Industrial investmsnet market.
Real Estate investment Cap Rates have all fallen in the past 4 years. There have been an abundance of investmenbt dollars chasing less than abunmdant invetsment portfolios. Retail Cap rates were the sweetheat in the 2005 era with rates approaching 15%, while the other catagories were in the 3-4% range. Now however, retail Cap Rates have fallen into the gutter of teh group at 4-5%, while Office is now leading the group at over 12%. Industrial is next at about 8% nationally. Although properties seem to be trading slightly lower than that locally at about 7.25%.
So while the uncertainty continues in the Capital markets along with low interest rates, all favor investment in commercial real estate, relativew to other options. The stepped up conservatism in the lending market may well push more investemnt into existing properties, further stabalizing Cap Rates.
And to quote a recent report “Commercial Real Estate has seen nothing but upside volitility for the past four years, and although it now is facing challanges, this asset class should hold its ownas an investment alternative on a relative basis.”