Investment US commercial real estate delivered the worst returns on record in 2009, but new IPD research indicates potential for income growth-linked recovery in returns this year.

The IPD US Annual Property Index fell 17.1 per cent in 2009, comprising a -22.4 per cent capital return mitigated slightly by an improved 6.6 per cent income return.
 
The valuation-based annual index is based on more than 3,000 properties from more than 45 core and value-added funds worth USD102.5bn at end of December 2009.

Beneath the headline record value falls across all sectors, segments, regions and cities in 2009, there are tangible signs that the US commercial real estate market is well placed to recover from a low base.

The positive outlook is driven by three factors: initial yields returning to long-term averages, ending 2009 at 7.1 per cent (only ten bps lower than 2003 levels, prior to the last property bull run); limited buying opportunities for new capital starting to emerge; and the potential for "bounce-back" in net operating incomes.

NOI growth is driven by maximising rents while minimising vacancies, concessions expenses and operating costs. Given strong GDP growth over the past two quarters, investors are expecting this to feed into employment growth and rental recovery.
  
Simon Fairchild, managing director at IPD US, says: “Net operating income has been more volatile than gross income due to the rigidities in operating costs – resulting in much more substantial falls during the downturn. 
 
“However, if NOIs stabilise – through expense reduction, cost cutting, dis-inflationary pressures and a bounce back in occupier markets – NOIs are primed for growth once the recovery takes hold and sustainable job growth materialises. In this scenario, the US commercial real estate market, after a minor lag, would be well placed to recover from a low base with increasing income as vacancies and rentals improve.”
 
US real estate vacancy rates rose in by 2.6 percentage points year-on-year to the end of 2009, driven by rises in three of the four main market sector. The residential sector was the only exception to the rule, which saw an increase in tenanted floorspace.