CBRE Investors Sees Risks in Changing Times

Herzbrun is the author of an article in the latest issue of the CBRE Investors Investment Research Quarterly titled "Is there life after recovery?" He tells GlobeSt.com that the title is a reference to the recovery that US real estate markets have enjoyed for the past three or four years since rebounding from the downturn in the early part of this decade.

The two chief risks that Herzbrun identifies are an overall change in the investment environment and the slowing of the US economy. He describes the first risk as a combination of the very high prices that investors have been willing to pay, as reflected in progressively lower cap rates, along with a number of other factors including the extremely low interest rates that have prevailed and the narrow spreads at which investors have acquired property.

The slower economic growth poses risks in terms of "the sustainability of property market fundamentals and current pricing trends," Herzbrun comments. He points out that some returns from operating properties, or core assets, "are trending below the risk-free 10-year Treasury." Such conditions indicate that "it is becoming increasingly difficult to get positive leverage when acquiring operating properties," he adds.

As recently as six weeks ago, Herzbrun observes, participants at real estate conferences were still talking about the abundance of capital chasing the deals. "Now we're hearing that there is volatility in all of the asset classes, not just in real estate, and people are wondering if we are past peak pricing," he says.

If we are past peak pricing, it has implications for financing, Herzbrun points out, especially for deals in which current property income can't cover the debt service. For a while, lenders were willing to look forward a bit and do the deal if the rents were going to cover the debt service within the next year or two, but now they are turning away from such situations.

Herzbrun assessment of the US market outlook also outlines other factors that will have long-term effects on investment returns, including globalization, which has caused shifts in US income patterns and resulted in America's transition to a service economy. "The shift in income patterns has profound implications in term of what type of retail and residential products will outperform averages over time," he tells GlobeSt.com.

Herzbrun's article details how these factors will influence the performance of different metro areas and regions of the country, as well as how they will affect the performance of specific property types, including retail, multifamily, office and industrial. The quarterly investment outlook, posted on the firm's website, sees opportunities for investors despite the risks.

"It's crucial for investors to be cautious in this environment, but not to be spooked," the outlook states. "If investors are selective, they can find investments that generate attractive returns," it says. The article concludes that, "there is certainly life after recovery."