Risks in Commercial Real Estate Shaking Investors

August 10, 2011 / Elizabeth Buckley, Commercial Property Analyst

A new CB Richard Ellis Group, Inc. (CBRE) report has projected different reactions from investors who are mostly affected by the market turmoil in commercial real estate.

Risks in Commercial Real Estate Shaking Investors

The report called Americas Viewpoint, “US Deficits, Debt and Commercial Real Estate,” analyzes the effect on commercial real estate of the recent economic slowdown, the Standard & Poors’ downgrade of the U.S. credit rating and turmoil in the global financial markets.

Asieh Mansour, CBRE’s Head of Americas Research, said: “The US faces multiple challenges including tepid economic growth, gridlock in Washington, and an unsustainable debt trajectory. The inability to enact a comprehensive solution to the economic and debt concerns led Standard & Poor’s to lower the long-term rating of the US debt from AAA to AA+.

“While we anticipate continued stock market volatility, commercial real estate will not fare as poorly because it remains a preferred asset class, within a well-diversified multi-asset institutional portfolio.”

According to the report, prepared by Mansour and Raymond Torto, CBRE’s Global Chief Economist, commercial real estate investors may have different reactions to current market conditions depending on how risky their profiles are.

“Investors with higher risk tolerance will look for opportunities in volatile markets while more risk-averse investors may delay new transactions,” CB Richard Ellis Group said.

The CBRE Viewpoint added that early signs in the CMBS market indicate a withdrawal of capital, with spreads widening.

“However, there continues to be ample supply of capital available for core deals and the report notes that lending rates should stay relatively low, with loans conservatively underwritten with stricter covenants.

“The more risk-averse capital will look for core, income-producing assets in primary markets to satisfy demand.”

The report further warns that there will be less transparency on pricing metrics for real estate assets as valuation metrics may become more difficult to underwrite.

“Reduced investor confidence will cause a rotation toward least-risky assets and increase demand for core assets in primary markets,” it stated.

“Assets further out on the risk spectrum; secondary markets, peripheral locations, value-add ‘plays’, will be less desirable until the economic uncertainty is reduced,” according to CBRE.

The CBRE analysis projects that the multi-family sector should be the least affected fundamentally by any slowdown and should benefit from increased investor risk aversion.

However, deal structure will be an issue and riskier opportunities will be more difficult to transact.

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