Commercial Real Estate Delivers First Positive Return in 18 Months

Returns on commercial real estate investments reached 1.2% in Q110, the first positive return in 18 months, according to the IPD Quarterly Property Index. The report monitors the trends in the underlying market value and returns of $76bn of assets held by real estate fund managers in the US. Returns fell to a record low in the 2009, bottoming out in Q109, according to IPD. Since then, US real estate has shown steady quarterly improvement. Pricing competition is even beginning to turn more aggressive amongst returning investors over the last two years, as the supply of prime real estate remains limited, according to IPD. The office sector of commercial real estate showed the biggest sign of improvement in capital value growth. Capital value shrank 0.7% compared to a 3.7% drop in the previous quarter. The residential sector was close behind, even turning positive at 0.4% growth from a 2.4% decline in Q409. “While most indications are that the worst of the write-downs are behind investors, uncertainties persist on the medium term health of the broader economy,” said Simon Fairchild, managing director of IPD North America. The analytics firm, Trepp, reported the delinquency rate among commercial mortgage-backed securities (CMBS) reached 8.02%, another record. Still, as shown in the chart below from IPD, capital returns are rebounding in all sectors of commercial real estate. For the market overall, Fairchild said early data from the Bureau of Economic Analysis showed the US gross domestic product (GDP) increased 3.2% in Q110 from last year but a full recovery is still to come. “[A]lthough, if economists’ predictions of a sluggish recovery are accurate then so too will be the pace of capital appreciation,” Fairchild said. Write to Jon Prior.