Wednesday, February 9, 2011

US commercial property prices may be too rosy

US commercial property prices may be too rosy -Vornado CEO

Reporting by Ilaina Jonas
Date:  Tue Feb 8, 2011 3:17pm EST

U.S. commercial property prices might be outrunning rents
Feb 8 (Reuters) - Prices on some U.S. commercial real estate prices have gotten so high they may not be able to generate enough cash to justify the price tag, Vornado Realty Trust's (VNO.N) CEO said.
Although prices are up over the past two years, rents in most U.S. commercial real estate markets are lagging.
"I think we've bottomed, and we're going in an upward trend," Vornado CEO Michael Fascitelli said on Tuesday while speaking at a real estate event hosted by De La Salle Academy, a private, independent, nonsectarian middle school for economically disadvantaged boys and girls located here in Manhattan.
"The question is what's the slope of that line going upward," he said. "The pricing is indicating a much more robust recovery in three to five years than I think we might have."

Since hitting lows in mid-2009, U.S. commercial property prices are up 33 percent but still off 18 percent from their peak in 2007, according to the Green Street Advisors Commercial Property Price Index.
Vornado chiefly owns office and retail properties in key U.S. markets, with most of the properties located in Manhattan and in the Washington, D.C. area. Those markets have been the primary beneficiaries of federal spending, either from the bailouts of Wall Street or the expansion of the federal government.

But elsewhere the U.S. commercial real estate market has been sluggish, mirroring job growth.
Interest rates still pose a risk for U.S. commercial real estate, whose sales depend on using a great deal of borrowed money, Fascitelli said. Low rates have helped owners hang on to their properties and have lifted prices by keeping borrowing costs low. The lower the borrowing costs, generally, the higher prices rise.
But it is unlikely interest rates will fall further, so real estate values will have to depend on income the properties generate from rent.
 
"I worry about rates spiking up without inflation in assets," he said. "You have to make the money by income going up. The risk is that you do OK on the front rentals for a while, but interest rate rises take all the juice away."

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