Property ManagementCommercial Earnings Decline, Apartments Remain Positive, Says Report
Estate Research Corporation (RERC), the deteriorating economy exacerbated by
the terrorist attacks on Sept. 11 has negatively affected investment conditions
for apartment and industrial properties as well as for office and retail
nationwide. In general, net earnings are being negatively affected as rental
growth declines and expenses inch upward.
Although apartments have thus far remained positive on a national scale,
third quarter data indicates that investment conditions have suffered due to
the accelerated economic decline since Sept. 11. In fact, rental growth
declined from 3.6% in second quarter to 3.0% in third quarter 2001, while
expense growth remained constant at 3%. Pre-tax yields rose by 10 basis points
during the third quarter, but there was no measurable change in going-in or
terminal cap rates. With the exception of a few supply constraint markets, most
apartment markets covered in the third quarter RERC Real Estate Report are at a
price equilibrium point or slightly past the peak, and show flat to decreased
rents and values for the next year.
Investment prospects for both warehouse and R&D industrials are also
declining. Rental growth declined from 3.0% to 2.1% for warehouse properties in
third quarter, while expenses increased from 2.9% to 3.0%. Similarly, rents
decreased from 2.5% to 1.7% for R&D properties, while expenses went up from
2.9% to 3.0%. Pre-tax yields and going-in and terminal cap rates also edged up
10 to 20 basis points. RERC suggests greater caution in this sector going
forward in 2002 due to the expectation that rents will continue to be outpaced
by expense increases and that vacancies will increase.
The office market has been suffering for some time, due primarily to the
discrepancy between supply and demand (additions vs. absorption). This
condition is common across the nation—of the 21 office markets RERC covers in
its third quarter RERC Real Estate Report, 20 markets are considered to be past
their peak and are approaching an oversupply situation. Rental growth in CBD
offices declined from 2.9% in second quarter to 2.5% in third quarter, while
expenses increased from 2.9% to 3.0%. For suburban offices, rental growth
dropped a full percentage point during the last quarter, from 2.2% to 1.2%,
while expenses increased from 2.9% to 3.0%. Pre-tax yield and going-in and
terminal cap rates for CBD offices remained unchanged from last quarter, but
increased 20 to 30 basis points for suburban office properties. RERC sees
office rent growth falling short of inflation, especially for suburban
properties, and except for well-leased properties, anticipates little
opportunity for growth in 2002.
Because retail investment cannot be disassociated from consumer spending, it
is not surprising that like the last two quarters, retail dropped even further
in the third quarter 2001, especially for non-discretionary spending. Rental
growth declined from 2.1% to 1.9% for regional malls, while expenses dropped
slightly (from 3.1% to 3.0%). The decline was more drastic for power centers,
with growth declining from 1.7% to 1.2% and expenses increasing from 2.9% to
3.1%. Rental growth for neighborhood and community centers dropped from 2.4% to
2.2%, and expense growth remained constant. Third quarter pre-tax yields and
going-in and terminal cap rates for regional malls, power centers, and
neighborhood/community centers generally increased 10 to 20 basis points over
second quarter. RERC maintains that 2002 will continue to be a difficult time
for consumers, and therefore, for retailers. Although limited opportunities
always exist, the investment potential depends on the property-specific
attributes of the type of retail, location, and relationships between tenants
and landlords.
This data, along with a special institutional overview comparing real estate
investment conditions nationwide prior to Sept. 11 and after Sept. 11, are
offered in the third quarter RERC Real Estate Report (Industry Outlook: 2002)
and through membership to the RERC DataCenter.
Founded in 1931, RERC is recognized throughout the industry as one of the
nation’s most respected firms dedicated to commercial real estate appraisal,
general real estate consulting, and independent and insightful investment
research on a national, regional, and metropolitan level. Information about
ordering the RERC Real Estate Report or subscribing to the RERC DataCenter can
be accessed online at www.rerc.com or by calling RERC at 319-352-1500.