PREI: Real Estate Markets See Slight Slowdown in Leasing and Transactions Activity Midyear quarterly outlook reports investment returns have peaked and will begin to moderate through rest of the year
RISMEDIA, July 25, 2006—While plenty of investment capital continues to chase real estate, overall investment activity appears to be slowing because of rising long-term interest rates and lofty asset values, Prudential Real Estate Investors (PREI(R)) said today in its midyear "U.S. Quarterly" outlook. PREI is the real estate investment and advisory business of Prudential Financial, Inc. (NYSE: PRU).
PREI expects that investment returns have peaked and will begin to moderate through the rest of 2006 and into next year. PREI continues to expect total returns on private, unleveraged real estate investments, as measured by the NCREIF Property Index (NPI), to be in the 12 percent to 15 percent range in 2006.
"Real estate fundamentals have continued to improve as the economy has expanded and while transaction activity continues at a fairly brisk pace, the market appears to be slowing from its somewhat frenzied rate of recent years," said Youguo Liang, managing director and head of PREI Research. "The balance of power seems to be shifting slightly in favor of buyers."
Higher interest rates so far appear to be affecting transactions involving secondary markets and inferior-quality properties.
"Increasing long-term interest rates have affected the multifamily market more than any other," Liang said. "Higher mortgage rates have made home ownership even less affordable after several years of home-price appreciation. Additionally, condo conversion rates have slowed dramatically except in a few markets with high demand." Those dynamics, according to the report, are contributing to strengthening tenant demand and double-digit rent gains in several markets, particularly in coastal areas.
The full report is available at www.prei.com. Highlights include:
-- Real estate investment trusts could provide total returns in the 7 percent to 10 percent range amid a volatile market for REITs and equities as the market adjusts to new leadership at the Federal Reserve and the global economy absorbs higher energy costs.
-- Debt markets could slow along with transaction activity, depending on how high interest rates climb. Investor demand for commercial mortgage-backed securities and collateralized debt obligations continued to drive lending activity in the first half of 2006 as investors continue to look for ways to bet on the property market recovery.
-- In the property markets, retail is the only sector where transaction volume has declined year-over-year, off by about one-third compared with the first five months of 2005 amid concerns about consumer confidence and energy costs. Office markets, by contrast, should see healthy rent growth, in part thanks to declining vacancy and the lack of new office development. Investors have also shifted from retail to industrial and apartment sectors. |
