Report: Commercial real estate slowdown in future?

Apartment buildings earned the highest return vs. risk rating by commercial real estate investors in a new survey.

Aside from regional success stories, a new report suggests a different storyline for commercial real estate companies looking toward construction and investment.

Pensions & Investments reported data from Real Estate Research Corp. that indicates another economic crisis could be looming in the future as a result of an influx of investor money in a specific asset class, ballooning prices to unsustainable levels.

According to the report, the commercial real estate investment rating overtook that of stocks and bonds, rising from 6.7 during the fourth quarter to 7.1 during the first quarter of 2013. Institutional real estate investors raised their ratings for commercial real estate because of a perception that such investments are safer bets. The investment rating of stocks was lowered to 5.7, falling by just one tenth of a point from the previous quarter.

"We've seen major markets, like New York City, get fully priced and a little ahead," Kenneth Riggs, chairman and president of RERC, told Pensions & Investments. "We anticipate the [commercial] real estate market will overheat next year. It would be a good thing if the air was taken out of momentum right now."

Riggs noted the recent announcement from the Federal Reserve to scale back its quantitative easing policies, allowing interest rates to rise, balancing out the market. The result will be lower prices, but commercial real estate will most likely perform better than bonds due to its ability to generate income.

Still, the overall discipline of capital rating – a tool used to assess investors' mindset when making investment decisions – fell to 6.5 amid a rising availability of capital during the first quarter. These figures indicate an increasing willingness to buy and ask questions later. 

"Maybe it's time to take a risk-off attitude," said Riggs. "Today, availability of capital is above the discipline…It is a signal that the market is overpriced."

Regional commercial real estate construction companies weigh the market
Crain's Chicago Business reported tension among developers who feel that, given the availability of financing from commercial lenders, they must purchase properties while they can.

Despite robust market performance in the Chicago area, Gary Janko, senior managing director of the Janko Group, said that construction of new buildings still doesn't add up. According to Janko, he can purchase existing Class-A assets at a nearly 40 percent discount when compared to what it would cost per square foot to build a similar property in the Chicago suburbs.

"You aren't going to build new today unless you can get some kind of a special deal on the land or you have a client who has very special needs," said Janko.

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