Principal Real Estate Investors Releases 2011 U.S. Commercial Real Estate Outlook
2011 Will Prove to be an Exercise in Balancing Caution and Opportunity
December 29, 2010 (Des Moines, IA) - Principal Real Estate Investors, the fourth largest institutional real estate manager in the United States, released its 2011 Outlook for U.S. commercial real estate. Click here to access the full report. (PDF: 150 KB)
“Looking ahead to 2011, we believe attractive investment opportunities include not only highly sought after core strategies, but also selective value-add and opportunistic strategies,” said Pat Halter, chief executive officer of Principal Real Estate Investors.
According to the report, there is reason for optimism in U.S. commercial real estate markets for 2011 despite growing government budget deficits and a below trend line economic growth trajectory that has yet to generate sufficient job growth to reduce unemployment rates. The report details how the current U.S. macroeconomic outlook is expected to translate into the four quadrants of U.S. real estate in 2011:
- Publicly Traded Real Estate Investment Trusts (REITs): Domestic REITs have taken advantage of favorable credit markets to deleverage and de-risk balance sheets and have performed quite well in 2010, although they appear to be close to fully priced. It is reasonable to expect REIT prices to remain somewhat range-bound pending additional clarity on the long-term economic outlook and the impact of rising Treasury rates on their cost of capital.
- Commercial Mortgage-Backed Securities (CMBS): CMBS prices rallied strongly in 2010 as improvement in the commercial real estate value led to a favorable reassessment of the adequacy of subordination levels to absorb potential losses. However, given significant differences across CMBS portfolios and vintages, investment selectivity will continue to be important, especially given the material portion of the CMBS mortgage universe that is below breakeven debt-service coverage ratio. Attractive opportunities remain for selective AAA mezzanine (AM) and AJ bonds.
- Private Debt: The preponderance of private debt capital continues to seek conservative, core loans, resulting in much less availability and higher cost-of-debt capital for lower-quality properties, value-add properties, properties in secondary and tertiary markets, and vertical development/land acquisition activities. CMBS issuance has made a comeback in 2010, providing debt capital to core sectors that have been of less interest to insurance companies. But the lack of capital for non-core properties may provide an opportunity for investors to help fill a financing gap by selectively moving up the risk spectrum in search of higher returns.
- Private Equity: Price corrections in U.S. commercial real estate appear to have ended, and property appreciation is underway in many sectors. Investors have primarily focused on core properties in primary markets which, along with favorable financing, has led to increased buying competition for core properties and driven cap rates down in 2010. However, higher-quality, value-add properties in primary markets may offer better relative-value opportunities within the private equity quadrant, especially if the trajectory of job growth begins to increase in 2011.
According to Halter, “Value-add and opportunistic strategies entail less competitive bidding, resulting in better opportunities to buy properties at prices well below reproduction costs. Such strategies could perform quite well—even if 2011 job growth is less than robust—if investors are sufficiently well capitalized and have strong leasing capabilities in order to take tenant market share away from weaker competitors.”
About Principal Real Estate Investors
Principal Real Estate Investors is the fourth largest institutional real estate manager in the United States based on tax-exempt assets under management and manages or subadvises $34.1 billion in commercial real estate assets. The firm’s real estate capabilities include both public and private equity and debt investment alternatives. Principal Real Estate Investors is the dedicated real estate group of Principal Global Investors, a diversified asset management organization and a member of the Principal Financial Group®.
- The 4th largest manager of real estate, ranked by U.S. institutional tax-exempt real estate assets, out of 99 managers profiled, as of June 30, 2009 “Real Estate Managers.” PENSIONS & INVESTMENTS, Oct. 19, 2009.