New York: US commercial real estate purchases may slump later this year as prices rise and lenders require buyers to put more cash into deals, said Inland Real Estate Group Inc. vice-chairman Joe Cosenza.
A "double-dip" in the commercial real estate market may come as soon as September when lenders "start seeing these high prices and say, ‘Wait a minute, we just came through this," Cosenza said in an interview at Bloomberg LP's Chicago office.
The Moody's/REAL Commercial Property Price Index climbed 3.6 per cent in May, Moody's Investors Service said in a July 19 report. The index has rebounded 8.6 per cent since October 2009 as competition for properties increased, though it remains 39 per cent below its 2007 peak.
Cosenza, president of Inland Real Estate Acquisitions Inc., predicted banks will reduce the share of debt they contribute to purchases and "that's going to back up a lot of deals."
Capitalisation rates, a measure of real estate returns, likely will increase as a result. The so- called cap rate is a property's net operating income divided by its purchase price.
Backlash predicted
Falling prices push cap rates higher. "I think you're going to see a backlash," Cosenza said. Inland and its affiliates bought about $3 billion (Dh11 billion) of property since 2009, mostly shopping centres, according to company data.
Commercial real estate sales fell 67 per cent to $44 billion in 2009 from a year earlier, according to New York-based real estate research company Real Capital Analytics. Sales rebounded 58 per cent to $34.2 billion in the first half of 2010 compared with the year-earlier period, according to preliminary figures from Real Capital.
Cap rates for commercial real estate are at 7 to 7.5 per cent, down from 9.5 to 10 per cent in the first five months of 2009.
"I haven't seen cap rates that high for years, maybe dating back to 1999," he said. "Most people were frozen in their tracks and sat on their hands. It was an opportunity you should never miss."
Cosenza predicted cap rates may settle in at 7.5 to 8.25 per cent later this year. At those rates, "I would buy as much as I could get my hands on," he said.
