US Commercial Real Estate Emerging from Crisis, Says ING Clarion Partners in Its Most Recent "US View" Report

NEW YORK – US commercial real estate appears to be emerging from its most serious crisis in decades, according to “US View 2010: The Path to Recovery,” a new report on the industry recently published by ING Clarion Partners.

Factors cited in the report include: 

• In contrast to previous recessions, value declines have been quick and steep, setting the stage for recovery.
• The spread between “cap rates” and the risk-free rate is well above the long-term average for all core property sectors.  Historically, this has suggested that real estate may be undervalued.
• National transaction volume across all major property types is generally improving from record low levels. In 4Q 2009 deals totalled $18.1 billion, up from $13 billion in 3Q 2009, but down from $20.1 billion in 4Q 2008.
• Financial markets are improving, with many publicly traded REITs able to raise large amounts of new equity.
• The anticipated deluge of distressed properties has not materialized as owners and lenders play for time.  This may portend a much more gradual re-pricing than many anticipated at the start of the downturn.
• Securitization is showing signs of life.  The $400 million sale of new commercial mortgage bonds by US mall owner Developers Diversified Realty (DDR) in early November 2009 was met with strong investor demand, and additional issuances have followed. 
• With the delivery of new supply expected to remain at very low levels for at least the next two years, the stage is set for a potentially rapid recovery in commercial property fundamentals as demand for space starts to accelerate.

The report notes that with interest rates low, income producing core assets in primary markets offering the potential of attractive yields are starting to see an increase in demand, while opportunistic and value-added properties, as well as properties in secondary and tertiary markets, have been slower to recover.  ING Clarion expects the amount of distressed debt to grow considerably over the next two to three years as more loans mature, creating potential opportunities for investors to establish positions in well-priced and/or distressed investments later this year and into 2011.

“We’re not out of the woods yet, but the fundamentals are generally pointing in the right direction,” said David Lynn, Ph.D., Director of Research at ING Clarion Partners and one of the principal authors of the report.  “Commercial real estate generally lags economic growth by about four to six quarters, suggesting we should be close to a rebound.”

NOTE TO EDITORS: A copy of the full report is available on request.