This article will attempt to describe commercial real estate prices and CMBS (commercial mortgage backed security) issuance from 2001 through 2009, construct an outlook for the coming months, and end with a couple of ETFs/funds that investors can use to gain exposure to the CRE (commercial real estate) market.
We should first note that the price index being used here is the Moody's/REAL Commercial Property Index:
[The index is a] periodic same-property round-trip investment price change index of the US. commercial investment property market based on data from MIT Center for Real Estate industry partner Real Capital Analytics, Inc (RCA).
An easing of underlying demand for commercial real estate reflects the drop-off in CMBS issuance. Associated with the lessened demand for commercial real estate is the decline in prices. The graph below depicts the yearly CPPI and total CMBS issuance dating back to 2001.
Now this picture may look bleak considering that prices dropped about 39% to their current levels, after reaching their peak in late October 2007. However, there have been glimmers of hope in 2010. Prices are up 3.20% since the beginning of the year and have recently increased in 2 straight months, April and May. The most recent increase of 3.64% in May was the fourth largest month over month increase dating back to 2001, when the index was first created. According to Bloomberg, in 2010 there has been a total of $23.47 billion in CMBS issued, which is up almost 60% from the comparable 7-month time frame from 2009. The table below displays the current figures.
Earlier in the week, there was more news that showed the CMBS market is starting to recover; Goldman Sachs (GS) and Citigroup (C) have said they plan to sell $788.5 million in commercial mortgage debt. As demand in the lowly commercial real estate market increases, we could continue to see a boost in the issuance of CMBS.
Now that we have presented a case for the recovery of CRE market, its time to look at a few solid investments that have exposure to this particular sector of the market.
We will begin with Mid-America Apartment Communities (MAA):
[This is] a REIT that focuses on acquiring, owning and operating apartment communities in the Sunbelt region of the United States.
This particular REIT is up almost 18% YTD while the lowly S&P is about even, at the time of this writing. The graph below shows how MAA has had no problem blowing through its 50, 100, and 200-day moving averages.
(Click to enlarge)
A second investment that has a friendly amount of exposure is the Ishares Industrial/Office Capped Index Fund (FIO), which tracks the FTSE NAREIT Industrial/Office Capped Index. Making up 17.37% of the fund is Boston Properties Inc (BXP), which owns and manages office buildings mostly in Boston, NY, D.C, and NY. There is also some international coverage in this fund, which comes from 8.3% weight of Prologis (PLD).
(Click to enlarge)
A third solid investment is Proshares Ultra Real Estate Fund (URE):
[This fund] seeks daily investment results, before fees and expenses, which correspond to twice the daily performance of the Dow Jones US Real Estate Index. The fund invests in equity securities and derivatives that advisors believes, in combination, should have similar daily performance characteristics as twice (200%) the daily return of the index.
I do understand this particular investment follows the Dow Jones Real Estate Index, which incorporates other sorts of real estate, not just commercial real estate. URE pays a nice dividend, and was recently split 1:5. The fund is up almost 24% YTD. It should also be noted that different strategies and careful monitoring is required for this double leveraged ETF, so take caution.
All in all, we expect CRE prices to remain choppy near term, but they will begin to rise in the coming months. As the economy gains strength and employment improves, these offices will begin to fill up again and purchases of commercial space will also increase. This will in turn help to increase prices, as demand rises, and drive the overall economic recovery forward. By getting in on these funds early, one can certainly expect to gain from the coming increased demand in the CRE market.
Disclosure: No positions