Danielle Douglas is associate editor of Real Estate Forum.
NEW YORK CITY-Despite the credit woes rippling through the commercial real estate investment market, with higher cost of capital and stricter lending, healthy demand and tight supply in most global markets will likely attract strong investment in year ahead. This was the prevailing sentiment of NAI Global's 2008 Global Outlook presentation, held today at the New York Athletic Club in Manhattan.
"We have solid fundamentals throughout the world with high construction costs, high land cost and more stringent criteria limiting the pace of development," related Jeffrey M. Finn, president and chief executive office of NAI Global. "We are seeing cap rates move up about 50 basis points across all categories, some more some less, but generally that's the range. That's pushing down prices, but it's counterbalanced with increasing rents to hold values."
Global economic growth is driving job growth and demand for commercial space at a pace that exceeds supply. This, said Finn, has fueled a rapid expansion of global leasing rates, particularly in the office sector. Several European cities, including Budapest, Madrid and Moscow, are experiencing office rental rate growth above 17%. And retail rates in markets like Moscow are recording a 45% increase. Though this exceptional growth is likely to slow in the coming months, demand will still outpace supply, Finn predicted.
Some of the most attractive investment prospects reside in the emerging global markets of Asia and Latin America, where product is least available. But the bustling economic growth in China and India, for example, has ushered in lofty land and labor prices in the major cities. As a result, Finn has noticed that, "Investors are going further inland into secondary and tertiary markets. People are also moving out into burgeoning economies like Vietnam, where we're seeing fantastic growth." Foreign direct investment in the country in the first seven months of 2007 rose by an estimated 55% and projections for GPD growth in 2008 stands at 8.5%.
In Latin America, there is great enthusiasm surrounding the rise of Argentina and Brazil as regional economic leaders. "These two larger economies have taken hold with stable inflation and lower interest rates," noted Finn, adding, "Now they are attracting tremendous capital and supply can't keep up with the demand for space."
One of the newer standouts on the continent is Columbia, where inflation has been tamed at 4% and the loan interest rate is down to 14%. Though Mexico has long been a point of interest for global real estate investment, Finn noted that the market is still undersupplied, with single digit vacancies across the board in all sectors.
With regards to the state of the domestic markets, NAI Global's chief economist Peter Linneman agreed that underlying property fundamentals are still healthy, especially in top tier markets. But, he suggested, that property players would likely take a wait-and-see approach in the first half of this year as the capital markets settle. Across most US markets there aren't many transactions, and of those that are taking place cap rates are off 10% to 15%. "As we come through this year debt spreads will start to narrow. Debt markets will start to function and as they do cap rates will start moving back down. By the end of 2008 cap rates will probably be in the range of 5% to 10% higher than they would have been a year ago today." Linneman concluded that, "If you keep cash flow going the property value won't be much different."
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