Survey reveals concern for commercial market

Commercial property values and rental prices are expected to continue to drop in 2010, according to a recent online survey of executives conducted by global consulting and accounting firm Deloitte.

Almost two-thirds (63 percent) of executives surveyed predict that a full recovery of the market will require two to three years, while 29 percent believe a full recovery will take four years or longer. Only eight percent anticipate a full recovery within the next year.

“The commercial real estate market continues to be adversely affected by one of the deepest recessions in decades.  Increased unemployment has resulted in less demand for office space, reduced rents and an overall decline in commercial property values,” said E.J. Huntley, principal, Deloitte Financial Advisory Services LLP and real estate consulting practice.  “Right now, commercial real estate executives are weighing their options, determining if the time is right to invest while prices remain depressed and before interest rates begin to rise.”

Roughly three-quarters (74 percent) of executives expect interest rates to rise in 2010, with 48 percent expecting rates to increase by 50 basis points or more, according to the online survey.  Executives also think cap rates (59 percent) and discount rates (57 percent) will rise; 40 percent predict cap rates to rise by 50 basis points or more and 35 percent anticipate discount rates will rise by 50 basis points or more.

Austin J. Jaffe, Ph.D., PAR’s consulting economist and chair of Pennsylvania State University’s Department of Insurance and Real Estate, said Deloitte’s findings aren’t surprising. Jaffe said key predictions in the survey include:

• Property values and rents will continue to fall.  There is little reason to believe prices will begin to climb again for some time.  Rents will have to stabilize first.
• Threat of rising interest rates. There’s a serious threat that interest rates at least in the mid-range and long-term are beginning to rise. The change in policy by the Federal Reserve (FED) to cease purchasing mortgages and Mortgage-Backed Securities (MBSs) at the end of March has signaled the beginning of interest rate rises.
• Cap rates are expected to rise. This is a direct result of the changes above.
• Full recovery will take time. Based on survey results, most executives believe recovery is two to three years away.  Business executives are typically optimistic so actual recovery may take longer.
• Buying opportunities exist. Executives are beginning to talk about looking for opportunities, according to the survey. This is a favorable sign but a weak one; everyone is hesitant to get back in the water or are interested in deals but only where prices have fallen significantly.

“Deloitte’s recent survey indicates that there remains considerable concern about the short-term conditions for commercial real estate,” Jaffe said. “Usually commercial real estate leads the residential sector regarding trends and changes. 

“For the past several years, the turmoil in mortgage and housing markets has reversed this tradition: residential real estate has been making most of the unfavorable news. Residential markets are showing signs of stabilizing and recovering now but commercial markets are facing their own refinancing concerns and a continuing weak general economy,” he added. “The decline in commercial prices and transactions are not expected to be as extreme as residential has been depending upon location.  It is also important to remember that individual transactions in the commercial sector are often very large but the size of the commercial market is relatively small compared to the home- owned public throughout the United States.”

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Tags: commercial, interest rates, retail, survey

This entry was posted on Thursday, May 6th, 2010 at 6:00 am and is filed under Economics, Industry News. You can follow any responses to this entry through the RSS 2.0 feed.