Recovery: False Bottom or Firm Foundation?
- May 18, 2010
With the third consecutive quarter of positive GDP growth, the second consecutive quarter of positive job growth and more enthusiastic consumer spending growth under our belts, we have increasing evidence that the fledgling U.S. economic recovery is sustainable. Investors, burned when the markets collapsed a couple years ago and who had been keeping their distance, have been returning to the fold as the risk and return metrics have moved in their favor—or, at least as far as they can see.
Commercial real estate investors who have watched their investment properties undergo hard repricing during the recession, are wondering whether it is time for them to jump back in the market as well, or whether what appears to be the bottom of the market is really a false bottom. According to Real Estate Research Corp.’s analysis of its institutional investment survey, the signals are that it is time to buy or hold commercial real estate.
RERC maintains that prices have found bottom and in fact, as we are seeing with the 30- to 50-basis-point drop in required capitalization rates reported in the spring 2010 RERC Real Estate Report “Recovery Gains Traction,” and the increased demand for top-tier assets, we do see where values have bottomed out and prices are beginning to increase.
In fact, the near term may be more attractive than the long term, given the current low interest rates and increasing availability of private equity. Although the Federal Reserve is expected to keep interest rates low for some time due to their expectations for continued low inflation and the risk of contagion from the financial crisis in Europe, eventually we will reach a fiscal day of reckoning when the nation’s debt must be paid off. For now, commercial real estate is regaining strength in the eyes of investors and there are plenty of investors that are standing on the sidelines gauging their strategic re-entry into an asset class that is a long-term investment.