Best Commercial Real Estate Investments for 2012

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Those looking for a solid commercial real estate investment bet in 2012 would do well to look to apartment properties in the nation’s secondary and even tertiary markets.

That was just one of the insights provided on this week’s “Commercial Real Estate Show,” which presents a wide-ranging look at the U.S. commercial real estate market and the state of real estate investment trusts (REITs) heading into next year.

Compressed capitalization rates in some of the larger, primary U.S. markets mean that “a best bet [in 2012] would be to look at secondary and tertiary markets,” said Mitch Roschelle, the practice leader of PricewaterhouseCoopers’ Real Estate Advisory Practice. In conjunction with the Urban Land Institute, PricewaterhouseCoopers recently released the “Emerging Trends in Real Estate 2012” report.

The report is based on interviews with and surveys of nearly 1,000 real estate experts. When compared with the 2011 report, it features increased ratings for all but one of the markets examined, Roschelle said. “That tells me that investors in general are bullish on the [real estate] asset class and don’t want to be part of the herd mentality chasing Washington D.C. and New York and Los Angeles,” he added. “There are plenty of great opportunities out there.”

Mitch Roschelle, US Real Estate Advisory Practice

Roschelle also noted that office properties located in secondary and tertiary markets and in need of some “TLC” represent good investment opportunities, as does land anywhere.

The report also includes land as a good bet for 2012. “Land is an incredible opportunity,” noted show host Michael Bull of Bull Realty. “You see some prices, and it just blows your mind how low they are.”

Still, “2012 may very well be a good year to start placing some bets in the sector, but I don’t think-to use a poker term-that it’s a year to go ‘all in,’” Roschelle said. “The recovery is going to be gradual, and there will no doubt be opportunities in 2013 and maybe 2014 to still make some bets on the way up.”

REITs Under the Microscope

As for REITs in 2012, Fitch Ratings has a “stable” outlook for multifamily, office, industrial and retail REITS, and a “positive” outlook for healthcare REITs, said Steven Marks, managing director of REITs for Fitch Ratings.

In the third quarter, multifamily REITs surprised by showing some slowing earnings, while REITs with suburban office properties demonstrated “a little bit of a positive upward trajectory,” Marks said.

Steven Marks, Fitch Ratings

“In terms of the other sectors – retail, industrial – [their third-quarter REIT performance was] pretty much as we expected: relatively flat-ish across both of those sectors,” Marks said.

Unsecured lines of credit from banks are the one bright spot for REITs in the debt capital markets, according to Marks. “The banks are literally falling over themselves to lend on an unsecured basis to the sector … ,” he said. “In terms of other forms of capital, the equity markets are fine.”

Robert Lehman, a partner with Ernst & Young, noted that while REITs “really held their own” in 2009 and 2010 when compared with other kinds of stocks, their performance has been “strikingly similar” to other types of assets in 2011.

“In a tight capital environment, there really is no longer an island that can protect you from what’s going on,” Lehman said.

The Effects of Uncle Sam

The show also touched on the effects that federal spending cuts could have on the commercial real estate sector. Such cuts would likely harm the sector in the short term by decreasing governmental demand for office space, Lehman said. However, consumer confidence could eventually rise as a result of a “more fiscally responsible government,” which in turn would boost the economy and the real estate sector, he added.

Marks said Fitch is not expecting federal spending reductions to be a factor in the near future. “We think that anything that’s going to happen on the governmental front is going to grind very slowly,” he said.  

To listen to the complete show, click this link.

The next “Commercial Real Estate Show” airs November 19 and will provide an update and analysis of the U.S. self-storage industry. It will be available for download at www.commercialrealestateshow.com.

Michael Bull, CCIM
Show Host, Commercial Real Estate Show
RadioShow@BullRealty.com

President, Bull Realty, Inc
800-408-2855 ext 2001