U.S. Commercial Real Estate Suffers Worst Fall on Record: IPD

Commercial real estate in the United States has suffered its worst annual capital return on record, according to ""Investment Property Databank"":http://www.ipd.com (IPD), whose data stretches back to 1978.

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The global real estate analysis firm, headquartered in London, reported this week that the IPD U.S. Quarterly Property Indicator fell 23.9 percent in 2009. That dive pushes the total capital decline to 33.4 percent from December 2007, when commercial real estate values were at their peak.

While the pace of market value decline eased over the final quarter, IPD says continued cap rate pressure together with weakening rental fundamentals is curbing optimism that 2010 is the year of recovery for the commercial sector.

“2010 in many ways is a crunch year for U.S. commercial real estate,” said Simon Fairchild, managing director for North America at IPD. “The ‘extend and pretend’ policies banks adopted last year to stave off loan-to-value covenant

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breaches may have curbed the tide of rising loan delinquencies in the short-term, but lenders and investors need to always retain a vigilant eye on the health of real estate fundamentals. One focus this year will be to track signs of stress in occupier markets, particularly in cities with rising vacancy rates,” he said.

IPD reported that U.S. commercial real estate income returns were robust in 2009 at 6.6 percent, partially offsetting the falls in value and contributing to an annual total return of -18.7 percent.

At the sector level, the strongest performer last year was retail, returning -14.8 percent, while at the other end of the spectrum, offices delivered a -20.9 percent return. The industrial and apartment sectors returned -20.2 percent and -17.0 percent for 2009, respectively.

Over 2009, there was a distinct geographic trend in the pace of capital depreciation, IPD noted, with the East Coast outperforming the West Coast in all four property type sectors.

Looking at the global picture, IPD says the 23.9 percent 2009 market value decline in U.S. commercial real estate compares with a 3.8 percent drop in the UK, buoyed by a fourth quarter rally which saw British property markets climb by a record 8.1 percent. The historically stable Netherlands real estate market fell by 5.6 percent over 2009, while the world’s worst hit market, Ireland, fell 28.9 percent.

The IPD U.S. Quarterly Property Indicator monitors the trends in underlying market value and returns of $76.5 billion of assets held by real estate fund managers in the United States.