Despite many reports (including one from the Congressional Oversight Panel-link below) earlier this year citing a potential for a commercial property melt-down in the US over the coming years, research by the Investment Property Databank* (IPD) indicates that there is some better news ahead for commercial property investors.
The IPD's latest annual report does show that 2009 was dire year for US investment commercial property, especially on a capital investment basis. But the report says that with yields returning to long term averages, limited opportunities for new capital to buy and the potential for a 'bounce back' in Net Operating Incomes (NOI) the outlook is positive.
The IPD report was based on over 3,000 properties from over 45 funds with a value of $102.5 billion at the end of 2009.
Any recovery in the market would therefore it seems be driven by income growth. The outlook for NOI growth looks good because of the strong US GDP growth over the last two quarters. This should not only feed through into employment but also help stabilise NOI volatility. The Managing Director of IPD, Simon Fairchild, said 'Net operating income has been more volatile than gross income due to the rigidities in operating costs – resulting in much more substantial falls during the downturn.
However, if NOIs stabilize – through expense reduction, cost cutting, dis-inflationary pressures and a bounce back in occupier markets – NOIs are primed for growth once the recovery takes hold and sustainable job growth materializes. In this scenario, the US commercial real estate market, after a minor lag, would be well placed to recover from a low base with increasing income as vacancies and rentals improve.'
Vacancy rates in 2009 were up 2.9% but notably the residential only sector actually rate fell by 2.4%. But with the pace of the recovery as at present IPD feels there is room for optimism as the commercial vacancy rates should fall.
The earlier COP report was concerned mainly with the effects a commercial property meltdown would have on the wider economy. If IPD are right then the future looks better. There are all those commercial property loans that need to be refinanced before 2014 but if the recovery continues this may become manageable.