A new white paper issued by San Francisco-based Forward Management LLC predicts that commercial real estate markets have already entered an up cycle and are poised for ‘slow, steady improvement’ over the next five to seven years.
According to the white paper – titled ‘Inflection Point: The Start of a New Cycle in Real Estate?’ – recovery will play out in uneven waves across U.S. and international markets. Knowledge-based ‘gateway’ cities and technology corridors are already recovering as job growth fuels demand across commercial property sectors. As vacancies drop and rents rise in those areas, demand will likely spill over into suburban job centers and secondary markets, the paper suggests.
‘Many investors see commercial real estate as tarred with the same brush as the residential market, but the dynamics of the two sectors are quite different,’ says Joel Beam, one of the three Forward real estate portfolio managers who authored the paper. ‘Commercial real estate didn't have the same kind of massive, debt-fueled bubble that brought down the residential sector, and commercial property prices and rents recovered fairly quickly after the financial crisis.’
The white paper forecasts that commercial property will experience a favorable supply-and-demand balance, especially in the multifamily and lodging sectors. It also noted the continued profitability of many real estate companies during the recession, while investors continue to see commercial properties as a sturdy source of future revenue.
‘We see real estate as an essential portfolio building block for investors who want to pursue long-term returns, find investment income, and manage portfolio risk through diversification,’ says J. Alan Reid, Jr., CEO of Forward Management. ‘As a broad asset class, real estate has returned an average of 11 percent annually over the past 30 years and has often been a reliable source of dividends. Our analysis suggests that it may continue to hold a variety of opportunities going forward.’