Uncertain Times Lie Ahead

In a report titled "Expectations & Market Realities in Real Estate 2011 -- Balancing Risk and Return in an Era of Uncertainty," Real Estate Research Corp., Deloitte L.L.P. and Real Capital Analytics Inc. assert that commercial real estate investment could potentially stay attractive. That's due to less volatility, more stability and increased transparency. However, the future also holds its downsides.

A triad of real estate firms have come together to present a mixed picture of the future.

In a report titled “Expectations & Market Realities in Real Estate 2011 — Balancing Risk and Return in an Era of Uncertainty,” Real Estate Research Corp., Deloitte L.L.P. and Real Capital Analytics Inc. assert that commercial real estate investment could potentially stay attractive. That’s due to less volatility, more stability and increased transparency. However, the future also holds its downsides. These include a slow economy, troubled employment growth, high commercial real estate debt levels slated to mature in 2012 and 2013 and high vacancy rates.

But even with these difficulties, the three firms say that a few select markets are experiencing some of the highest prices ever paid for commercial real estate in terms of high-quality properties. In addition, they believe investors may be starting to go further onto the risk spectrum when it comes to properties in secondary and tertiary markets.

One major deal that could rock the boat of the commercial real estate world is the recent 1 million-square-foot lease inked by Conde Nast at the World Trade Center. Experts believe the move will kick Manhattan into higher gear, particularly the downtown area. In Florida, a state particularly hard-hit by the recession, Transwestern has shown faith in the industrial market by committing to property management of nearly 4 million square feet. That square footage is spread out throughout 25 assets across the state. And in Jersey City, New Jersey, the $310 million acquisition of the 827,300-square-foot trophy buildings at 70 and 90 Hudson Street not only broke records in terms of price per square foot, but is the third-largest office deal ever to transpire in the Garden State.

According to Real Estate Research Corp. president & CEO Kenneth Riggs, a primary concern is accounting for the risk in today’s environment. Given the price of some properties that have sold during the past few quarters, he says, it is an open question how the market is measuring risk in the recovery cycle. Since there is a heightened risk aversion, he questions why some investors are willing to pay historic prices for properties.

Of course, there will always be those outliers who are willing to go out on a limb, whether it’s real estate or any other sort of risk. But can the market be measured by these brave souls? Deloitte real estate services practice valuation leader Matthew Kimmel asserts that while the world is seemingly more uncertain than it has been in years, there is a flight to quality and to core markets that indicates investors are seeking a balance between risk and return.

And while forward movement is choppy with the market being pulled in different directions by economic and political concerns both at home and abroad, Real Capital Analytics associate publisher Peter Slatin says, the top sphere of the market boasts strong support. Moreover, he believes, that support appears to be moving beyond the most vibrant markets and highest-quality properties in the country. We can only wait and see if this rising tide lifts all boats.