Awful ’09 Making Way for Hopeful ’10: IPD Conference Speakers

The U.S. commercial real estate market turned in the worst performance on record in 2009, posting a return of -17.1 percent for the year, according to results of IPD’s first U.S. annual index. IPD unveiled the findings and the index during a presentation Tuesday morning in Midtown Manhattan.

March 17, 2010
By Paul Rosta, Senior Editor

Courtesy Flickr Creative Commons user bfick

The U.S. commercial real estate market turned in the worst performance on record in 2009, posting a return of -17.1 percent for the year, according to results of IPD’s first U.S. annual index. IPD unveiled the findings and the index during a presentation Tuesday morning in Midtown Manhattan.

IPD analyzed the performance of 49 funds representing 3,100 office, retail, industrial and multifamily assets, explained Simon Fairchild, IPD’s managing director for North America. The -17.1 percent return reflects a -22.4 percent capital return slightly eased by a rare positive indicator—a 6.6 return on income, Fairchild explained. In a year of steep declines, a few niches fared better than their general property sectors, such as super-regional malls and office properties in central business districts.

Taking a snapshot of the global highlights, IDP co-founding director Ian Cullen cited the strong global links between gross domestic product and commercial real estate investment, and said that GDP improvement would be a harbinger of better returns. He noted that the United Kingdom scored a remarkable turnaround in 2001, following what he called an “absolutely dreadful” -46 percent annualized decline the first half of the year with a 37 percent improvement in the second half.

In one provocative finding, Cullen asserted that a five-year study of U.K. trends suggests that “Leverage does not, in normal circumstances, deliver excess performance.” Cullen also raised some eyebrows in the audience of several hundred with the conclusion that the global office market delivered the lowest returns at the highest volatility between 1998 and 2008. “It really doesn’t matter where you are, you shouldn’t invest in office,” he said.

Other speakers offered a cautiously offered a cautiously optimistic outlook on the U.S. economy and the prospects for commercial real estate investment this year. “The good news is we’re in a recovery,” said Beth Ann Bovino, a senior economist for Standard & Poor’s, during an economic overview that opened the session. “The bad news is, it’s going to be a slow and uneven one.” One culprit is non-residential construction, which Bovino called “the weak link” of the economy. Regarding interest rates, Bovino speculated that the Federal Reserve could raise the federal funds rate before the end of the year but will probably wait for more improvement in the job market.

During the panel discussion that concluded the presentation, the panel’s moderator, IPD senior advisor Wylie Greig, cited evidence that cap rates are finally starting to inch downward. Cate Polleys, a principal with EnnisKnupp, predicted that the commercial real estate market recovery will proceed “by fits and starts.” And

Mark Roberts, global director of real estate research for Invesco, quipped that his company has already had first-hand experience with that phenomenon. Improvement by fits and starts, he explained, is “thinking you’re bidding on an off-market deal, then turning around and finding that there are 26 other bidders on the same property.”