Dividend Capital, a real estate investment management firm, publishes a research report each quarter on commercial property market conditions. The research report is prepared by Dr. Glenn Mueller, who aside from working for Dividend Capital Research is also a professor at the University of Denver, and a person for whom I have great respect. The latest real estate market cycle report is available here.
According to Dr. Mueller, the recovery has now started in all five major property types (apartment, industrial, office, retail and hotel) with improvements in occupancy rates, although only apartments have seen rental growth so far. Looking at more detailed property type classifications, all but one of the 13 property types were either at the bottom of the cycle in Q3 or had moved into the recovery phase.
The report also notes that commercial mortgage lending by life insurance companies - which had been the major source of capital before bank lending for CMBS pushed them out in the 1990s - increased 59% during the quarter, while the spread between commercial mortgage lending rates and U.S. Treasuries narrowed. Neither of those developments means that capital is readily available, but they provide additional indications that the CRE downturn may have passed its worst point.
That doesn't mean we won't continue to see commercial mortgage defaults, distressed property sales and declining transaction prices. Even though operating fundamentals may have started to improve, real estate investment managers that paid too much during the 2005-2007 bubble - and that borrowed too much in the process - are still going to be in deep trouble when their mortgages mature. We may not see transaction prices appreciate meaningfully until long after the fundamental recovery has gotten well underway - probably not until 2012, in my opinion.
Still, investors in publicly traded REITs have been anticipating that REIT earnings would grow through improved operating fundamentals as well as through accretive acquisitions, so it's good news that the fundamental improvement may well have begun.
Disclosure: Author is long Vanguard REIT Index Fund (VNQ) and ING Real Estate Fund.
Disclaimer: The opinions expressed in this post are my own and do not necessarily reflect those of the National Association of Real Estate Investment Trusts ((NAREIT)). Neither I nor NAREIT are acting as an investment advisor, investment fiduciary, broker, dealer or other market participant, nor is any offer or solicitation to buy or sell any security investment being made. This information is solely educational in nature and not intended to serve as the primary basis for any investment decision.