US Commercial Property Market are Showing Signs of Improvement

NNN Lease Market 

The fundamentals of the US commercial property market are showing signs of improvement, with vacancy rates expected to drop over the coming year. According to the National Association of Realtor s’(NAR's) quarterly commercial real estate forecast, a strengthening across all sectors of the market is anticipated. Two-thirds of the professionals questioned stated they believe there will be an improvement during the first quarter of 2012, while rental increases are also on the cards. NAR chief economist Lawrence Yun commented: "Sustained job creation is benefiting commercial real estate sectors by increasing the demand for space. Vacancy rates are steadily falling."

A decline in the empty space available in the office, industrial, retail and multifamily housing sectors is predicted between the first three months of this year and the same period in 2013, with vacancy rates in the retail industry likely to fall the most - dropping from 11.9 per cent at present to 11 per cent in a year's time. Meanwhile, it is the multifamily housing market that has lowest vacancy rate, currently standing at 4.7 per cent. The NAR noted this makes it a "landlord's market, with demand justifying higher rents". Mr. Yun observed that apartments are likely to be a lucrative real estate investment going forward. "Leasing is on the rise and rents are showing signs of strengthening, especially in the apartment market where rents are rising the fastest," he asserted.

Saturated Real Estate Market Being Flooded

NNN Lease Market


The 2001 recession was relatively mild in comparison to past recessions and depressions
that the United States economy experienced. The main factors that contributed to this
short downturn, were the tech bubble burst, the terrorist attacks on the World Trade Center
and a series of very much publicized accounting scandals, such as that of Enron. The real
estate market was only slightly affected by this recession. Cap rates increased slightly while
many investors shied away from the volatile stock markets and decided to put more money
into real estate and especially the attractively liquid REIT market which proved to be a
quick and easy way to hedge risk.
Despite the NBER officially declaring June 2009 as the end of the 2007 recession, the data
shows that GDP has not reached average quarterly growth level of 3.28%
until the first quarter of 2010 and even showed a declining trend starting after the first half of 2010.
In comparison, the year over year growth did not reach the median until mid-2010.


Researchers agree that the recent recession was caused by "the collapse of the housing market
and the resulting sub-prime mortgage crisis that led to bank failures in the US and Europe."
Businesses had a difficult time obtaining credit for real estate acquisitions, refinancing, or new
developments. Record high oil prices are also quoted as a reason for the worldwide economic
downturn. The impact of this international recession could be seen in the stock, as well as the
real estate markets.


 As the liquidity crisis forced many businesses to sell part of their real estate
portfolios, the situation worsened due to the already saturated real estate market being flooded
with many more properties that had to be foreclosed or sold at sometimes half their prior values.

The commercial real estate market, as well as most other financial sectors, has been vastly

affected by the 2007 recession. Even though the recession was officially declared to be over, cap

rates and other economic measurements did not recover until many months after June 2009.

Demand for commercial real estate and GDP growth over the past decade have not been highly

correlated. Despite a relatively stable growth in the United States’ gross domestic product,

commercial real estate transaction volume skyrocketed until mid-2007 and then began to steeply

decline, indicating that investors put too much trust in the unsustainably increasing prices of real

estate. 

A valuable lesson than can be learned from this, is for investors to have a realistic outlook

on the future of their investments. Real estate is not, as it is commonly thought of, a “safe bet”.

However, it is one of the most stable and profitable investments one can make relative to S&P

500 stocks, which lost over 56% of their value in the 2007 market crash and only recovered 63%

of that loss over a course of almost three years.

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Residential Building Construction Up

NYC residential building construction up

Residential building construction rose in 2011 by 33 percent across the five boroughs, according to a New York Building Congress analysis of U.S. Census data released today.

The city’s Department of Buildings issued permits for 8,936 new residential units in 997 buildings in 2011, up from 6,727 units in 1,074 buildings in 2010. This is still appreciably below the 2008 peak, when permits for 33,911 units in 2,434 buildings were issued, the report says.

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Cap Rates Fell by 25 Basis Points in 2011

Overall, net lease cap rates fell by 25 basis points in 2011. The primary drivers of this trend are lack of product (especially high quality product) and an ease in lending conditions. 


Construction of new net lease product continues to flow at a trickle while financing has become more available – with local and regional banks competing with insurance companies for credit tenant deals. Investors have shown the willingness and ability to invest but are hindered by lack of product to satiate their demand. This lack of supply and increase in demand has forced prices up and cap rates down – many would argue that 2012 promises to be a seller’s market in 2012. It is worth noting that these numbers illustrate the average trend in net lease cap rates and the net lease market itself is highly diverse depending upon tenant, lease terms and location. 

Though these factors have always been significant, their effects have recently compounded. Investors have shown a preference for high quality tenants in prime – urban and suburban – locations and are willing to pay some of the highest prices in recent years to obtain them. Cap rates in prime markets can be up 125bps lower than the charted averages of many segments. However, investors are increasingly showing interest in properties containing lower credited tenants or located in secondary locations – exchanging risk for higher returns. Net lease investments continue to gain traction as an alternative investment instrument for cash flow and yield investors.








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CPPIB Eyes Real Estate Deals

TORONTO (Reuters) - Canada Pension Plan Investment Board, fresh from striking its biggest real estate deal ever, is weighing three or four other acquisitions as it looks to scoop up undervalued assets in a tumultuous global property market.

CPPIB struck three major real estate investments in the last month. It is part of a joint venture that agreed a $4.8 billion deal to buy a U.S. regional mall portfolio from Australia's Westfield Group (WDC.AX: Quote). CPPIB paid $1.8 billion for its stake, its biggest bet ever on real estate.

Also this week CPPIB said it would join forces with one of Britain's top commercial property companies, Land Securities Group (LAND.L: Quote), to develop land in Victoria Circle in London's West End.

Eadie wouldn't give specifics about any deals in the pipeline except to say he was keeping busy.