Amidst the budget deficit debate and
the seemingly endless crisis affecting the Eurozone, US commercial real estate
quietly delivered a positive return of 4.3% in Q2 2011, according to the
IPD US Quarterly Property Index.
Capital values increased by 2.8%, an
improvement over the 2.2% growth experienced in the first quarter. To date, the
US property market has recovered 13.6% of the 33.6% of value lost during the
downturn. Initial yields fell slightly during the quarter, to 5.6%, but remain
competitive, with the yield on the benchmark US 10-Year Treasury bond averaging
3.2% over the quarter.
“The next quarter is going
to be an important barometer for US commercial property markets, given the
uncertainty introduced by Standard & Poor’s downgrade of US sovereign debt and
the vigorous debate in the US congress over the strategy for reigning in growing
budget deficits,” said Jim Valente, director of
Performance and Risk Analytics at IPD, the London-based property index firm.
“However, the market has been
aware of the potential downgrade of the federal government’s credit rating to
AA+ for quite some time. As a result, after an initial correction, the downgrade
is unlikely to have significant long-term effect, unless it results in wider
spread downgrades of related entities and important partners (other governments)
whose growth is closely tied to the cost of credit and economic growth in the
Washington D.C. offices suffer
Government uncertainty: Washington D.C. office returns, though still strong,
moderated over the past two quarters, after posting the highest returns in the
index throughout 2010. Capital values in the metro area grew by 3.0% in the
second quarter. At the same time, West Coast office markets saw their recovery
in capital values accelerate, primarily in San Francisco and Los Angeles, where
values grew by 5.0% and 3.4% respectively in the second quarter, versus 4.0% and
1.3% in Q1.
Valente continued, “The moderation
of performance in the Washington D.C. market is twofold, partly the result of
the re-pricing sequence running its course, but also due to slowly growing
concern over potential long-term structural spending cuts by the Federal
Government, the primary driver of the local economy.”
New York apartments lag those of San
Francisco: Despite the recovery of rents in the New York apartment market, the
highest total returns for residential property in Q2 2011 were found in San
Francisco, which delivered a total return of 6.6% for the quarter. New York was
tied with Washington D.C. in second place with both markets posting total
returns of 5.5% in Q2.
Retail Underperformance: Retail
performance was muted during the quarter. Capital values grow by only 1.8%, and,
combined with an income return of 1.5%, delivered a 3.3% total return. Within
the retail sector, neighborhood shopping centers and power centers experienced
the strongest growth in capital values, at 2.8% and 2.6% in the second quarter.
“Given continued weakness
in the housing sector and jobs market it is not surprising that the retail
sector is lagging the recoveries being experienced in the other property
sectors,” concluded Valente.
The IPD US Quarterly Property Index
measures $96.5bn at the ownership share of the properties in predominantly core