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CHICAGO-While LaSalle Investment Management does not see any bubbles on the horizon for commercial real estate, investors will need to take on greater risk to boost returns. "When viewed through the twin lenses of the broader capital markets and 25 years of history, however, current pricing does not seem so outrageous," authors of the firm's Investment Strategy Annual note.
While hard charging price appreciation in most housing markets has fueled talk of a real estate bubble, LaSalle Investment Management's report dismisses the notion commercial real estate sectors are in jeopardy of bursting. The firm's research shows that while home prices in Miami have taken off in recent years, the Nasdaq still is running ahead of REIT prices as well as the private real estate market.
Miami home prices soared 174% from the fourth quarter of 1997 through the first quarter of 2005, according to the "Investment Strategy Annual," while the Nasdaq posted an 1,127% appreciation from the third quarter of 1990 until the first quarter of 2000. Meanwhile, US REITs increased 91% from the fourth quarter of 1999 through 2004 while private US real estate managed only a 58% gain from the fourth quarter of 1995 through the third quarter of 2005.
"The ingredient that would turn today's high commercial real estate prices into a bubble is the possibility of a total collapse in values," according to the report. "We do not see that element at work anywhere in the private direct markets today."
Recommendations for 2006 include investments in high-cost suburban multifamily markets, industrial assets in US port cities, medical office buildings and office assets in Sunbelt suburbs, lifestyle retail centers and full-service urban hotels. Those seeking higher returns are advised by LaSalle Investment Management to consider moderate multifamily rehab projects in markets where condominium conversions are absent, industrial developments in secondary hub markets, high-vacancy office buildings in high growth markets, mixed-use redevelopments of existing retail malls and hotels in need of repositioning or capital infusions.
While the reward may not be commensurate, investors may be forced to accept greater risks, LaSalle Investment Management researchers conclude. "Our viewpoint is that most investors will have to take on more risk to secure a given unit of return," LaSalle Investment Management's team predicts. "By the end of 2006, we expect hurdle rates and yields to have fallen further, absent any major crisis in the world's markets."
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