Real estate may be strong investment in weak economy

Real Estate Weekly, Nov 14, 2001

In light of the recessionary environment in a number of sectors of the economy, real estate may provide an attractive alternative as an investment class in 2002, according to Cushman & Wakefield executive managing director, financial services, Tim Welch. The firm forecasts that low interest rates, plentiful capital available for investment in the property sector, and the lack of overbuilding that marked the last downturn in 1991 will support the investment sales market.

"There are several factors that make real estate a good play for 2002," said Welch. "The lowest interest rates since the Kennedy Administration, a wealth of capital available and generally sound real estate fundamentals bode well for the market." However, these factors will be somewhat offset by declining demand, and recently completed additions to supply that will exacerbate weakening market conditions. While well-positioned, real estate is certainly not immune to difficulties in the national economy.

Welch said that Cushman & Wakefield will negotiate $8 billion in investment sales and financings in 2001. "We already have $2.3 billion in investment sales in the pipeline for 2002," Welch said. "Real estate is a pretty attractive investment right now. As an investment class, it is currently returning seven or eight percent, much higher than the average dividend payout on stocks, and the prospect remains for appreciation in value."

Long-term players see the value in investing in commercial real estate. "If you hold onto your investment for five years, the current market outlook suggests that you are going to see an 11 to 14 percent return," he said.

The Cushman & Wakefield executive offered these insights into the various traditional real estate investment players:

* REITs: REITs have proven to be very resilient, and very adaptive to the market. Because REITs have not had ready access to public markets through additional stock offerings for over three years, many of them have become more innovative in how they access capital. For example, S.L. Green has begun a joint venture with Prudential Real Estate, which allows Green to purchase more property with available funds, and Lend Lease and Equity Office have also organized an entity to acquire an existing portfolio, as well as new properties. Welch pointed to the fact that a number of REITs, including Equity Office Properties, were added to the Standard & Poors 500 index, a move that will enhance liquidity and is further evidence that investors are accepting the sector as a mainstream investment alternative.

* Opportunity funds: In the U.S., opportunity funds have scrambled to identify properties which are suitable for their investment strategies, and generally have been net sellers for the last year in this country. Supply and demand are basically at equilibrium now, and the debt market does not have the distress that characterized the early 1990s. This distress led to the growth of the opportunity funds, and the lack of it is the reason they are not as prominent on the acquisition front today.

* Institutions: An informal Cushman & Wakefield survey of major financial institutions found most institutional owners have acquired 25 percent less property in 2001 than in 2000, and have sold 35 percent less in 2001 than in 2000, through September. "The market has slowed down, and there are fewer opportunities to buy because the discrepancy between buy and sell expectations that began in the second quarter of 2000 has continued," Welch said.

Welch said that cap rates for office product would remain in the 9-10 percent range. "They may be a little lower in strong downtown markets, and a little higher in suburbs with commodity product," he said. "The next 12 months could be a little soft, given the national economy. But the long term player will do very well over the next several years."