Ties that bind – part 1

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From Ben Breslau
Managing Director, Americas Research
Jones Lang LaSalle

With this month’s ULI Fall Meeting on our radar screen, the Boston Blog caught up with Ben on what’s next for real estate development.

Q: Let’s address the ownership and operations of commercial real estate as an investment strategy. How are institutional owners viewing their real estate holdings in today’s climate? 

BB: While momentum has certainly built in the real estate investment markets over the last few years, investor are generally still risk averse, given all of the political and economic uncertainty in the current environment. 

For high quality well located core properties in the greatest demand, returns for debt and equity are back toward historical lows. Spreads, however, remain near recent historical highs given where treasuries are today.

With cash and bonds earning zero or near zero yields, huge interest rate risk looming for bond portfolios, and equities very volatile, real estate remains an attractive relative investment luring capital allocations to its income producing and hard asset qualities. 

Owners of existing real estate properties are feeling a very spotty and uneven environment for operating their assets. Multifamily, office assets in gateway CBDs, tech and energy markets, and modern big box distribution facilities in hub distribution markets have seen fundamentals improving with vacancy declines, rising rents, and leverage swinging toward owners from tenants.

The rest of the commercial market, including commodity and suburban office space, older industrial, and much of the retail market, remains sluggish in terms of demand. It is challenging for existing landlords from an leasing, operating and asset management perspective. “Flat is the new up” for these segments. 

-Ben

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