US commercial property investors may still have to wait until 2011 to see their returns grow, as returns are expected to stay in the negative this year, said CB Richard Ellis Group’s research arm.
“The worst is behind us because (values) won’t be dropping as fast,” said Serguei Chervachidze, the Capital Markets economist for CBRE Econometric Advisors (CBRE-EA). “That translates into total returns as well.”
He added that the greatest slumps probably occurred in Q3 2009, although the returns in Q4 are not yet available.
CBRE-EA’s forecasts are based on the NCREIF Property Index, compiled by the National Council of Real Estate Investment Fiduciaries, an industry group that represents pension fund advisers and investors. The index accounts for the total rates of quarterly returns based on an extremely large pool of privately held commercial properties.
The total returns to date have dropped by double digits since the peak levels, noted at the end of 2007. The total returns refer to the net operating income plus the change of the property portfolio’s value over a year.
The total returns for US office properties have fallen by 23 percent, and for warehouse and distribution centres by 21 percent. Returns for retail properties are down 15 percent to date, and for apartment buildings by 23 percent, based on the NCREIF index.
Based on the index, CBRE-EA reckons that under the most likely conditions, returns will remain negative for the whole of 2010 and grow positively by 3-11 percent next year.
It expects values to fall 30 to 53 percent from the peak in Q4 2007. Factoring in the slide since then, values are around one-third to halfway there.
According to CBRE-EA, commercial property’s stronger, positive income returns generated from rents should somewhat mitigate property value declines this year.