Commercial real estate investment bucks recession

In the months following the start of a national economic recession, investors demonstrated faith in the value of commercial real estate, which posted the second highest deal count and the third highest dollar volume in the past five years, acording to a recent news release from the Certified Commerical Invest-ment Member Institute.

The mean price levels for all property types except land remained above $10 million and the median deal price reached $13.2 million, which indicates that large investors remained a force in the property arena.

Several key conclusions revealed in the CCIM/Landauer Investment Trends Quarterly, a broad-based survey of na-tional commercial real estate investment activity.

Despite an "official" recession that de-buted in March 2001, according to the report, virtually all indicators of commercial real estate activity during third- quarter 2001 pointed to a robust market, the release stated.

The average capitalization rate rose to 9.6 percent 20 basis points or two-tenths of 1 percent over the second quarter, signs of investor confidence in future returns and steady asking prices for properties.

The number of commercial transactions reported was the highest since late 1996, a time when real estate investment trusts REITs were the most active market players. The dollar volume in third-quarter 2001 dipped 14.6 percent, however, from the record level obtained in the previous three months.

Interest rates

Attractive interest rates were instrumental in market activity. Short-term interest rates, which were reduced nine times during the first nine months of 2001, gave investors leverage to purchase new properties, the report said.

"The decline in interest rates pushed by the Fed provided exceptional opportunities for buyers to use the positive leverage available in the 200 basis-point spread between the average cap rate and cost of borrowed funds," said CCIM Institute President Cynthia Shelton, CCIM. "One key difference between the current economic downturn and the recession of the early (19)90s is that there is a very efficient commercial mortgage-backed securities (CMBS) after-market for debt instruments," she added.

However, even with the vital CMBS market, the present recession more than likely will have a negative effect on commercial real estate.

"We should anticipate generally weak absorption, rising vacancies through 2002 and greater nervousness on the part of investors," said Hugh F. Kelly, CRE, author of the Investment Trends Quar-terly. "For some investors, however, next year will represent a buying opportunity, since some buyers prospered in the post-1995 years following the weak economy of the early- to mid- (19)90s."

Other key findings from the third quarter Investment Trends Quarterly are:

Multifamily properties continued to generate demand, most notably institutional investors.

In the third quarter, the apartment sector captured a record 24.5 percent of the total transactions. The median average of apartment units per transaction was 287, a clear indication of institutional investment.

Commercial investment

Office investment remained high, with 44.7 percent of the total dollar volume, virtually identical to the percentage of investment dollars for this property type over the past five years. High prices in the Mid-Atlantic states led investors to lower-costs regions like the Great Lakes and Mountain states.

The horrific attacks on Sept. 11 did not signal a halt to commercial investment in the final days of the third quarter. Be-tween Sept. 11 and month's end, 68 sales worth more than $1 billion were closed, according to the report.

The CCIM/Landauer Investment Trends Quarterly represents a broad-based sampling of third-quarter 2001 transactions with a total value of $12.3 billion, the majority of them reported by CCIMs. Since the survey was initiated in 1995, more than 11,000 transactions valued at $175 billion have been analyzed.