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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: X Y Zebra who wrote (21277)	6/3/2004 11:05:30 PM
From: X Y Zebra	Respond to of 306849

homes.wsj.com Experts Weigh In On Real Estate's Future By RAY A. SMITH Special to RealEstateJournal.com With the economy recently showing signs of improving, there is widespread belief that it's only a matter of time before the Federal Reserve raises interest rates. (The Fed's current target for its benchmark federal-funds rate, the rate charged on overnight loans between banks, is at a 46-year low of 1%.) Many real-estate investors naturally are concerned about what rising interest rates mean for the commercial-property market and trying to figure out what they should do next. Many have e-mailed me asking for answers. Here is a sample of what some real-estate brokers and researchers think about the near-term future for commercial real estate. From Petch Gibbons, president and chief executive officer, Advantis Real Estate Service Co., a GVA Worldwide Partner, Washington, D.C.: "As rates go up, a few fundamental changes will occur. One, the leveraged buyers will begin to dissipate. That is, the buyers who use a great deal of debt, due to low interest rates, will obviously be at a disadvantage. So, the number of these buyers will begin to dwindle. Two, the owners who have a great percentage of leverage (debt), will now be in a more precarious position, particularly those with assets with high vacancy rates. Three, the suggested strategy becomes: If you are a buyer that has the capital to make acquisitions with little or no debt, target those assets with owners who are highly leveraged, particularly those assets that have high vacancy rates. One of the improvements to the commercial real-estate business is that increased interest rates should free up more inventory for sale. One of the problems we've had is there are little if any assets available for sale. The owners who have assets that are highly leveraged, especially those with high vacancy rates, will now have pressure to sell those assets." From Robert M. White Jr., president of Real Capital Analytics Inc., a New York-based real-estate research firm: "My belief is that cap rates (returns on investment) may not rise much, if at all, if interest rates rise. I really believe that there is so much capital yet to be invested, particularly by institutions that are insensitive to interest rates. In addition, rents and occupancies will improve as the economy gains steam, and inflation always benefits real estate. Historically, the spread between cap rates and interest rates has been the lowest during periods of economic recovery or periods of inflation. Spreads usually go negative (i.e., cap rates are lower than interest rates) in inflationary times. Also, the spike in steel and lumber costs is going to temper new construction, which should help rents and occupancies to rebound even faster during this recovery." From Woody Heller, executive managing director, group head, capital transactions group, Studley, a New York-based commercial real-estate services firm: "Interest rates have been so low that there's a little bit of increase that the market can absorb before causing a repricing [of assets]. Having said that, some investors are suggesting that these initial [interest-rate] movements are taking the [pricing] premium out of the market. Interest rates and cap rates [returns on investments] move in the same direction, but not always to the same extent. Even though rates have risen, there is still an unusual amount of displaced capital in the system that continues to seek investment opportunities and continues to keep prices high." -- Mr. Smith is a staff reporter for The Wall Street Journal. His "Building Value Q & A" column appears each month exclusively on RealEstateJournal. Click here to e-mail him a question about investing in real estate. OTHER ARTICLES BY THIS AUTHOR