10 Issues Facing Commercial RE Now

The following prognostication is from GlobeSt.com following a recent interview with advisors at LaSalle, a real estate investment firm.

LaSalle analysts provided these top 10 issues they believes could steer commercial real estate’s direction:

1. Cost of Debt - Lending rates have doubled in the last six to 12 months. And loan to value ratios are also moving to require larger down payments.

2. Rising Corporate Bond Yields – These cause upward pressure on discount rates and exit CAP rates. CAP rates will follow interest rates upward to avoid dreaded “negative leverage” traps.

3. Higher Required Returns - Investors will seek slightly higher returns from real estate, given that alternative credit market products will now be priced at higher yields.

4. Capital Will Flow to Real Estate - Real estate has a reputation as a better inflation hedge than fixed income. As an asset class, real estate will likely maintain its status as a favored asset class while securities markets experience volatility.

5. Capital Market Shifts - Investors will move away from fixed long-term leases and toward shorter indexed leases.

6. Rising Cost of Construction – Thus causing a chilling effect on construction, wherever rents can’t keep pace, as well as soaring materials and labor costs. Although the upward pressure on cost (labor and materials) should ease for a bit as the economy slows.

7. Higher Energy Prices - Higher occupancy costs will erode tenants’ ability to pay higher rents.

8. Slowing Demand - While central banks attempt to cool off overheated sectors, broad-based tenant demand will likely step down a notch because monetary policies are blunt instruments that don’t distinguish well between sectors. In some parts of the world, ‘recession’ danger signals are flashing.

9. Currency movements - Differentials in interest rates/inflation will favor currencies with rising interest rates. This could raise hedging costs for currencies with lagging interest rate increases.

10. Rising Expenses - Just about every expense category associated with operating a property will be under upward cost pressure. Operational-intensive properties that require a lot of headcount or energy consumption could be most affected.

LaSalle is a real estate investment firm and an independent subsidiary of Jones Lang LaSalle (NNYSE: JLL), one of the world’s largest real estate companies.

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