RE fundamentals expected to weaken

Real estate fundamentals are set to weaken in the US with predictions rents – and prices – could start to decline, according to the president of New York-based private equity real estate firm GoldenTree InSite Partners, Tom Shapiro.

Shapiro said that despite the shock of the credit crunch, real estate fundamentals had yet to be materially affected in asset classes other than residential. However, speaking to PERE, he added that situation should change, predicting more pain ahead for the retail and office sector in particular.

“I’m probably more negative than most,” he said, adding: “But I think what we are beginning to see is tenants taking the decision not to expand and to actually give up space they may have previously reserved. I think retail and office rents will come down, and with them prices.”

Shapiro, a former senior managing director at investment firm Tishman Speyer, said once fundamentals started to weaken, the industry would start to see more retail and office-related bankruptcies. “Why buy today when prices will come down tomorrow?” he added.

The financial sector was one example where job cuts and consolidations were having an impact, Shapiro said. In July, Merrill Lynch announced it would not be moving its headquarters to one of the office towers planned, but not yet built, at the World Trade Center. JP Morgan’s takeover of Bear Stearns earlier this year could also result in unwanted office space following the two firms’ merger.

This week, the US trade body, the Real Estate Roundtable, also revealed in their latest survey that almost nine out of 10 senior professionals thought the market was “much worse” than one year ago. The report said 95 percent of real estate chief executives felt that access to debt financing had reduced over the past 12 months, with 74 percent stating that availability of equity capital had also declined over the same period. In a general assessment of the state of the market in the US, 41 percent of respondents said the outlook for the commercial real estate market was now “much worse” than last year – compared to just 31 percent in April.

Yesterday, UK listed property company British Land also warned about weakening fundamentals in the British office market saying in its quarterly report that occupancy markets were now beginning to “reflect the effects on customers of the economic slowdown.” There was subdued leasing activity in the office market, the report said, leaving “prospective rents to drift downwards” while in retail rental growth, although positive, was “slowing.”

GoldenTree InSite, with $1.2 billion of total committed equity, has focused investments on Brazil in recent years, developing residential affordable and moderate-income homes, as well as investing in office, industrial and retail. Shapiro said there were some “exciting opportunities” in the country, with the expansion of the mortgage market and the growing affluence of the population. The firm is expected to invest up to $600 million in equity in the country this year alone.