Cap rates will peak at 8% in 2011

US commercial real estate prices are not expected to fall as severely as during the RTC of the 1990s, with cap rates predicted to peak at 8 percent by 2011.

A research report by Richard Ellis yesterday warned that appraised cap rates would not top the 10 percent levels seen in 1994 and 1995 by some US property sectors, saying investors waiting to buy at the bottom “may be disappointed”.

The opportunity to buy, the firm said, could come “sooner than [investors] expect and at less attractive pricing than they would like”.

The opportunity that investors can solve today, and thus generate wealth from today, is the dislocation in the capital market. This repricing is not only the biggest problem the market faces today, it also represents the greatest opportunity. The Upside of the Downturn CB Richard Ellis Econometric Advisors

Industrial and retail appraised cap rates are expected to hit a peak of between 7 percent and 8 percent by 2011, while office is estimated to peak at just more than 7 percent between 2010 and 2011. Multifamily is expected to peak around 5.5 percent in 2010, and very slowly contract over the following three years.

In it’s The Upside of the Downturn report, CBRE EA said industrial and office cap rates would stay at their peaks for more than a year. However, the firm counteracted that by saying real estate markets tend to spring back into life more quickly than perhaps anticipated.

Historically, US markets took about four years for cap rates to hit their peaks, but once the recovery started cap rate contraction “occurred rather quickly”. The firm said it didn’t project the US recession to last longer than two years, although it noted vacancy rates for US commercial real estate would hit record-high levels during the current downturn.

The major difference to the 1990s, CBRE EA said, was the driving force of the current recession – credit.  “Distressed assets in the current market will not be like those seen in the downturn of the 1990s. Rather than focusing on half-empty assets, in the current environment investors will need to concentrate on solving the problems of undercapitalised owners.”

In trying to offer advice on answer the age-old questions of when to invest and in what, CBRE EA said there would be opportunities for making money today.

“There will be some but they are expected to be a limited number compared to those presented during the recovery from the early 1990s downturn, when largely empty assets were leased up in a growing market.

“The opportunity that investors can solve today, and thus generate wealth from today, is the dislocation in the capital market. This repricing is not only the biggest problem the market faces today, it also represents the greatest opportunity.”