Real Estate Recovery Threatened by Economy

9/26/2011 | By Carisa Chappell
Commercial real estate may be losing its momentum when it comes to recovering from the recession, according to a September 2011 report from Green Street Advisors highlighting the ups and downs in the current market.

A slowing economy combined with low confidence and overstretched balance sheets threaten to impede the real estate recovery, said Peter Rothemund, analyst with Green Street.

“What’s going on right now in the markets is that investors are saying we don’t know if it’s going to be sunny and 65 degrees or rainy and 35 degrees. They are packing a margin of safety that we see spilling over into the commercial property market,” said Rothemund.

The repot noted that the type of discretionary spending on which many REIT-owned properties depend is likely to be constrained for quite some time due to falling consumer confidence.

Additionally, Rothemund said the jobs picture has bleakened in recent month and the projected growth rate for the next few years has slowed from 200,000 per month to something closer to 150,000 per month.

“If the economy can grow at 1.5 to 2 percent a year then things will be fine and there will be rent growth, but if we double dip then people will vacate spaces and rents will fall, but if we go into something bigger who knows what will happen,” he said.

However, Rothemund said that a lack of new supply is the silver lining to a deep recession. The current pace of growth for new construction is at a multi-generational low so occupancy gains will likely be healthy, even if demand growth is slow.

“That’s great news if you’re not a developer,” said Rothemund. “New supply is very low in every sector in 2011. Pipelines are quickly rebuilding for apartments, but littler adverse impact will occur until 2013,” he said.

In terms of the public market valuation, the report noted that REITs are attractively priced when compared with investment-grade bonds. Additionally, Rothemund said office REITs are expensive while industrial REITs are cheap.

Despite the fact that real estate remains cheap relative to investment-grade corporate bonds, Rothemond said recent weaknesses in REIT share prices has caused the premium to asset value to nearly vanish.

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