The sluggish recovery lingers, and the new standard for most commercial real estate investments is lower returns. Still, compared to stocks, bonds or cash, commercial real estate remains an attractive investment. RERC’s latest survey reports that, on a scale of 1 to 10 (with 10 being the highest), commercial real estate scored a 6.7, the highest investment rating among investment alternatives at year-end 2012.
Although commercial real estate continues to be a good investment, to get a better sense of its true performance, it helps to look at some actual math behind this statement. A good way to do this is by looking at the risk-adjusted metric (RAR Metric) that RERC produces. This is a metric that ranks property types based on their NCREIF returns relative to their standard deviations.
Although the apartment sector continues perform well, with an RAR metric near the top of the list, the sector is losing some of the momentum it had in 2011 and 2012, when the 1-year returns were notably higher than the other sectors. This is likely due to stringent mortgage underwriting, which is keeping some potential buyers on the sidelines despite low interest rates.
The regional mall and neighborhood-community centers, as well as the industrial warehouse and R&D sectors currently have the same RAR Metric, while the office and hotel sectors round out the bottom of the list, as they did for the last half of 2012. Adding to the strain of these two property sectors are the stubbornly high unemployment rate which is hindering small business growth.
Examining RERC’s RAR metric, it’s apparent that no property sector stands out more than any other from an investment perspective. This infers that a property-level study that incorporates a well-supported appraisal and a thoughtful and through accompanying analysis is essential to complete a successful property acquisition. And although market fundamentals continue to improve, as does appreciation, economic challenges continue to remain a threat to the commercial real estate investment market community in 2013. An in-depth analysis of the market is the best way for investors to navigate through these times.