While we heard much last year about the mounting health of residential real estate, it seems that commercial real estate is slated for growth this year as well. We saw early premonitions of this during the latter half of FY2012, with foreign finance players eagerly scoping America’s urban real estate. In fact, we’ve reached a point where American real estate investments have developed one of the most optimistic growth outlooks for property holdings among developed nations.
However, according to new analysis from Seeking Alpha contributor Malay Bansal, current figures point towards broad appreciation in the value of commercial real estate. Bansal points towards reports from the close of last year that point to substantive gains in the value of commercial-backed mortgage securities. These holdings not only demonstrated a substantive rally in market performance, but also outperformed analyst expectations for yearly gains. The question remains as to precisely why commercial real estate securities performed exceptionally well last year.
Current signs point towards a series of economic positives working in tandem to strengthen commercial real estate’s overall outlook. As I’ve noted in a prior post, residential real estate’s excellent 2012 performance was likely motivated by a chain reaction of disparate market factors. The rate of mortgage default and percentage of mortgages underwater both dipped throughout 2012, while newfound consumer confidence coupled with low housing prices worked to increase the volume of home closings.
The macroeconomic factors that seem to be encouraging gains in commercial real estate are of a somewhat different character. As Malay Bansal’s Seeking Alpha post noted, CMBS spreads tightened significantly last year. This, it reasons, may have been encouraged by Federal Reserve quantitative easing and security purchase programs. While many market surveyors are naturally skeptical of public sector involvement in private commerce, Bernanke’s policies have been demonstrating positive outcome, at least in the immediate. Additionally, mortgage payoffs have begun to outstrip new issuances at the close of FY2012.
While the combination of elevated mortgage payoff and efficacy of Federal Reserve initiatives are tightening the spreads of standing CMBS holdings, consumer confidence and private loan responsibility are working their magic for commercial property values as well. As it stands in the first month of 2013, the borrowing costs for commercial real estate owners has decreased substantially. This has yielded lower debt services payments and allowed property holders to accrue greater loan amounts on their standing properties. This fortunate combination has meant that many loans that had previously expected to default or were otherwise beyond refinancing are now in the fiscal clear.
A ginger balance of factors, to be sure, but for those actively looking to invest in commercial real estate securities, it seems as if the market outlook is much sunnier. Commercial properties holdings look slated to mature in value gradually throughout the next five years, with standing market factors pointing towards potential for asset growth. While the real estate market’s recovery is still in a tentative early stage, savvy observers would seem well advised to consider real estate securities as a potential source of investment growth.