Commercial Real Estate Still Attractive Despite Credit, Single-Family Woes

Maybe old dogs can indeed learn new tricks. A report released today by Deloitte L.L.P. suggests that the commercial real estate industry has learned from past booms, and that the lack of overbuilding compared with previous cycles is a factor in keeping commercial properties attractive as an asset class. The Deloitte report, 2008 Real Estate Capital Markets Industry Outlook: Top Ten Issues, notes that although commercial returns are cooling and will probably be noticeably lower this year than last, “when compared to other investment categories (stocks, bonds, etc.), commercial real estate remains an attractive investment vehicle due to its stability and opportunity for diversification..” Characterizing the current situation as “crunch, not crisis,” the report notes that “the impact on commercial real estate has been limited when compared with other investment vehicles, such as commercial paper.” Though highly leveraged deals are pretty much off the table, the report says, and low spreads are gone, capital is still available for deals with sound fundamentals. “The investors who face the greatest challenges in this environment,” the report says, “are likely to be those that made a recent purchase that was highly leveraged and at a low cap rate.”Dennis Yeskey, Deloitte’s national director/real estate capital markets and one of the report’s authors, told CPN that a variety of niche opportunities are already attracting capital, one of them being land banking, typically with homebuilders selling land to opportunity funds.  “Everybody seems to have started a distressed-debt fund,” Yeskey (pictured) continued. “Mezzanine funds are very hot.”On the global front, he commented that, even though overseas commercial property is still relatively new for many investors, global or specific-country funds are growing. “Russia suddenly popped up on everyone’s radar screens,” Yeskey noted.