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 United States.”

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 open-ended funds.