Current Events in the World of Industrial Property

This is a great article written by The Financial Times. Click here to visit the article online.

The trick to eating the curate’s egg is to sample only the good parts. Investors in US commercial property are showing they know how to do this. In the six top metropolitan markets – New York, Chicago, Boston, San Francisco, Los Angeles and Washington – prices have bounced. Real Estate Analytics calculates a trophy index using repeat transactions worth more than $10m in the Moody’s/REAL commercial property price index. After falling two fifths from the October 2007 peak, it is up 19 per cent from the trough, while the overall market has had a 7 per cent bounce. For many investors, ultra-low bond yields make the rental yields on the safest properties look all the more appealing.

Meanwhile, much of the country is spoiling. Prices in distressed areas are so depressed that yields are typically twice that for trophy spots. Consultants Reis put the office vacancy rate nationally at 18 per cent. This is below the 1992 peak of 19.2 per cent, but the latest boom was not accompanied by the same levels of excess building, meaning a lack of demand is now the problem. Companies must start hiring again if the available space is to fill up.

So far lenders are praying and delaying. But this will get harder as maturities pile up: Foresight Analytics estimates that half of the $1,475bn of commercial mortgages maturing between 2010 and 2014 are underwater. Refinancings begin next year for commercial mortgage-backed securities of the boom-time 2006-2007 vintage, struck at peak valuations and thin levels of interest coverage.

The worst case would be widespread defaults and a wave of regional bank failures. Yet even if borrowers survive and live with interest rates returning to normal levels, the prospect is for capital to be sucked towards replacing existing loans rather than funding productive new lending. At best, a repeat of the 1990s – when commercial mortgage lending grew by less than a per cent annually in real terms – seems plausible. The curate can keep his egg.

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