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Tuesday, March 4, 2008

Commercial Real Estate: Safe Haven Investment

While economic uncertainty and the credit crunch have led to investor anxiety in many markets, commercial real estate remains comparatively attractive, according to Deloitte LLP’s recently released report, 2008 Real Estate Capital Markets Industry Outlook.

"In prior boom cycles, commercial real estate has responded by overbuilding. The industry has clearly learned its lesson because this time commercial real estate is enduring a credit crunch, not a crisis, partially because it resisted this urge,” said Dennis Yeskey of Deloitte’s Real Estate Capital Markets practice.

"No doubt the industry is in a strong position to withstand a recession, should one occur, and commercial real estate remains a viable investment option for those seeking to diversify and insulate their portfolios from market volatility.”

The Deloitte report discloses that commercial real estate (CRE) has "evolved from an asset class characterized by steadfast returns and low volatility to a ‘Best in Show’ asset class providing investors with both high yield and high stability . . .
"Despite several stock market run-ups in the last few years, CRE has shined, outpacing stocks and bonds on a 1-year, 5-year and 10-year basis.”

According to the report from Deloitte’s Real Estate Group, which has offices across the U.S. and in Europe and Asia, CRE "has been a clear winner in terms of performance and stability, in addition to offering diversification for investors.

"Early in 2007, the story that appeared to be developing was the emergence of asset class parity, as rebounding stocks as well as private equity and hedge funds emerged as more significant competition. During the first three quarters of 2007, however, private CRE returns held steady as stocks endured significant and repeated volatility.”

The report makes a number of positive observations regarding commercial real estate, including:

  • Over the 3-year period from 2004 to 2006, core private commercial real estate had annual returns of more than 17 percent, while the S&P had an average annual return of 10.44 percent over that period, NASDAQ returned less than 7 percent, and bonds returned less than 5 percent.
  • Due to the weak U.S. dollar, commercial real estate in the U.S. is relatively attractive to foreign investors compared to other international markets.
  • Overall vacancies in commercial real estate remains stable, and rent continues to increase.

The "Bottom Line,” according to the report: "Going forward, investors would do well to stop comparing commercial real estate returns to the previous few years’ performance, and to take a closer look at how these returns fit into the big picture.

". . . when compared to other investment categories (stocks, bonds, etc.), commercial real estate remains an attractive investment vehicle due to its stability and opportunity for diversification.”

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