Litt: Cap Rates Down, Fundamentals Up

While cap rates continue to fall, commercial real estate market fundamentals appear ready to begin slowly turning a corner, according to Jonathan Litt, managing principal of real estate investment firm Land and Buildings Investment Management LLC.
Litt said in a report that recent meetings with more than 50 management teams had shown that the debt and equity markets are approaching "more normalized spreads," leading cap rates to trend downward. He noted that transaction activity had started to increase, with assets changing hands at prices higher than expected.
Litt also said there was optimism that the market's overall picture for fundamentals would soon improve, albeit at a slower pace than expected.
"On the fundamental side, most management teams are seeing or expect to see a bottom in fundamentals in the first half of 2010. However, most caution, and we concur from our on the ground work, that the improvement in fundamentals is a trickle and not a flood," he said.
Litt pointed out that the slowdown in building during the recession has eased concerns about an excess supply of commercial space. As a result, increases in demand should positively affect market fundamentals, he said.