Office buildings lead real estate investments

Office buildings nudged out other commercial real estate property types as investment vehicles in a national market that has been battered by unprecedented natural disasters, rising long-term interest rates and declining capitalization rates, according to the Investment Trends Quarterly released in November by Real Estate Research Corp. and Certified Commercial Investment Member Institute.

According to survey data, office space was the only property type to score a higher “investment conditions rating” in the July through September period than in the previous three months. Institutional survey respondents rated central business district offices at 6.4 compared to 5.6 in the second quarter, and suburban office scored 5.7 compared to 5.4 in the second quarter.

“Although the office sector’s absolute level of volatility is the highest among the four core property types, its relative volatility has declined due to capitalization rate compression,” said Kenneth Riggs, CCIM, president and CEO of Real Estate Research Corp., in a news release. “This provides underlying support for values and offsets income declines.”

Nationally, office properties captured 40.8 percent of the dollars spent in the third quarter and accounted for 34.1 percent of the total number of deals. The pre-tax yield or internal rate of return for central business district office properties was 8.4 percent and 8.9 percent for suburban properties. (A pre-tax yield, or internal rate of return, is a rate of interest that discounts the total expected cash flow from an investment to present value.)

Apartment properties

Results for apartments were disappointing, as the sector’s investment rating dipped 30 basis points from second quarter to 5.4. Apartments have the lowest required capitalization rates of the major property types. In the third quarter, the required going-in capitalization rates declined 40 basis points while required terminal capitalization rates declined 30 basis points. (Capitalization rates are measurements of expected returns. Required rates are the returns investors are requiring for the risk associated with these respective properties.)

“Some respondents thought apartments were still a good investment, while others cited apartments as the worst investment type because they are overpriced, have little growth potential and could be at a risk for major price readjustment if the condominium conversion market fails,” Riggs said.

An independent research survey conducted in the third quarter by RERC showed a significant increase in the number of first-time buyers of commercial real estate.

Of the more than 200 commercial professionals surveyed, two-thirds worked with investors making their initial entry into the commercial market. Retail properties led the pack, followed by apartments, offices and land. The most commonly used ownership structures were, in order of preference, individual investors, owner-users, joint ventures, tenants in common and limited partnerships.

Hotel investments

Investment Trends Quarterly also revealed that hotels continued to hold investors’ confidence, posting the only double-digit pretax yield at 11.3 percent. However, that figure still represents a quarterly dip of 20 basis points.

The median price per room jumped to $131,900 in the third quarter from $117,000 in the previous quarter. “Hotels continue to be the most volatile property type,” Riggs said. “But most of the volatility over the next five years is expected to be on the upside.”

Retail properties

The pre-tax yield for the three major retail categories – regional malls, power centers and neighborhood/community centers – fell 30 to 40 basis points in third quarter, and the required and terminal cap rates declined 40 to 50 basis points. Still, consumers continue to spend, despite a reduction in discretionary income.

Retail properties garnered 17 percent of all sales in the survey, a one percentage point dip.

Research and development

Despite slightly lower investment rating conditions, warehouse and research and development sales have been robust, with transactions through September 2005 reaching $25 billion, twice the volume compared to the same period in 2004.

Transaction data in the Fourth Quarter Investment Trends Quarterly were based on a quarterly total of 2,366 closed transactions with a value of $76.5 billion. Sales data were provided by CCIM members, contacts in the marketplace, and gathered through public information sources.

Based in Chicago, the CCIM Institute confers the Certified Commercial Investment Member designation to commercial real estate professionals through an extensive curriculum of 200 classroom hours, in additional to professional experience requirements.

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