Revisiting the Case for Commercial Real Estate

The fallout from the credit market crisis and severe global recession in late 2008 and early 2009 has taken a heavy toll on commercial real estate.

Executive Summary

• Commercial real estate presents a compelling opportunity in today’s market, albeit not entirely without risk. Property values are far below the peaks of late 2007/early 2008, reducing the potential downside.
  
• Operating performance at commercial properties is likely to remain weak for another year or so. However, with renewed job growth, space market fundamentals should improve steadily in coming years.
  
• The commercial real estate industry still must solve the massive financing gap problem caused by the overleveraging in the last property cycle. While the sector has attractive long-term potential, it will take some years to resolve all the distress.
  
• Commercial real estate’s fundamental investment characteristics – high cash yields, low correlations with stocks and bonds and a hedge against inflation – should appeal to investors seeking stable current yield and some protection against unexpected inflation.