US real estate returns slow in Q1 2011, says IPD
US real estate value growth fell in the first quarter of 2011 to 1.1%, a 150 basis point decrease from December last year, according to the IPD US Quarterly Property Index. While growth slowed, the US commercial property market has now recorded a full year of positive capital growth, amounting to 9.4%.
Simon Fairchild, IPD Managing Director, speaking at the launch, held at the Langham Hotel in Boston, Massachusetts, said, "While the US real estate market continues to claw back some of the value losses it experienced in 2008 and 2009, the recovery is patchy and the pace of capital appreciation slowed in the first quarter of 2011," says Simon Fairchild, IPD Managing Director. "Relatively rich yields on commercial real estate are coming down to earth and investors are starting to incorporate higher inflation and interest rate assumptions into pricing.
"Slowing capital growth in the first quarter is very much in line with other commercial property markets across the globe, which have seen a narrowing of returns in 2011, as economies settle down to a long, slow recovery."
Jim Valente, Director of Performance and Risk Analytics at IPD, says: "To date, not all US markets are showing improved performance, and in those markets where stronger appreciation is occurring, it is being driven by investors willing to accept lower income yields - and hence bid up prices - rather than underlying growth in rental incomes. "With this said, the commercial real estate recovery is broadening across markets and property types. This is clearly tied to the varied recoveries in local job markets, with those markets experiencing stronger recoveries in their local job markets also experiencing stronger recoveries in their real estate performance."
Commenting on the increased investor activity, Valente says: "At the fund level, investors are clearly becoming more active, as capital flows back into the sector. In the first quarter, we began to see active decisions, buying, selling and developing, make more meaningful contributions to fund performance. This had not been the case in 2010 when these activities acted as drags on performance."
Since the downturn began US commercial property has lost 33.2% of its capital values, while recouping 9.4% in the bounce-back to date. Residential property saw the greatest recovery in values, partly a result of increases in the rented sector seen due to the decrease in home ownership - a result of the crisis and the continuing difficulty in obtaining purchasing finance for private buyers.
There was a 2.4 percentage point spread between sector returns, with Industrials recording the highest returns of 3.8%, off the back of 2.1% capital growth. Both Offices and Retails suffered declines in growth, to 1.5% and 0.9% respectively, producing total returns of 3.1% and 2.6%. The Residential sector saw capital growth flat-line to zero, leading to an almost entirely income driven return of 1.4%.
East and West Coast Offices continued to outperform the other Office sectors, with returns of 3.6% and 3.3% in Q1 respectively. Those in the South continued to lag, recording 1.2%, after suffering negative capital movements of -0.4%. Miami in particular suffered. Retails in the South fared little better, with capital growth falling to just 0.2%, and delivering returns of 1.8%, while retails in the Mid West actually saw returns increase over Q1, to 3.0%, boosted by capital growth of 1.2%, a 20 basis point increase on Q4. Residential returns suffered in all regions, seeing capital growth decline to 0.5% in the Mid-West, South and West, while Coast values actually fell by 0.9%.
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