Commercial Real Estate May Be Poised to Rebound

Yields on United States commercial real estate are nearing record levels compared to Treasury bonds, a sign to investors that the time to buy may have arrived.  Capitalization rates, which measure real estate yields, averaged 7.22 percent in the 2^nd quarter, according to the National Council of Real Estate Investment Fiduciaries (NCREIF).  That translates to 429 basis points – or 4.29 percentage points, higher than yields on 10-year government bonds as of June 30, 2010.

Investors, though still wary, are showing interest in top-quality office buildings, hotels and apartments as the gap widens, said Nori Gerardo Lietz, partner and chief strategist for private real estate at San Francisco-based Partners Group AG.  “The data indicate that real estate is poised for a rebound,” Gerardo Lietz said.

The NCREIF index measured 6,066 properties with an estimated market value of $234.5 billion.  The spread over Treasury yields was analyzed using transaction cap rates based on real estate based on real sales – 48 of which occurred during the 2^nd quarter – and tend to be more dependable than appraised values.  Investors usually balance property yields with Treasuries to establish how much profit potential real estate offers when compared to a low-risk investment.  The spread fell to less than 80 basis points, the smallest in 16 years, when commercial real estate prices hit their peak in 2007.  Since then, Moody’s Investor Service says property values have fallen by 40 percent.

“Property is attractively priced versus the fixed-income market,” said Ritson Ferguson, chief investment officer of ING Clarion Real Estate Securities, whose management portfolio is valued at approximately $12 billion.  Some investors are still wary of the wide spread because of the weak economy, reduced commercial rents and occupancy levels.