SOURCE: Wall Street Journal Online

According to the author of this article, Alex Frangos, "The pace of U.S. commercial construction activity -- which had remained strong despite a sharp contraction in housing -- is showing signs of slowing and could drop next year for the first time since the early part of the decade, the latest sign that companies are turning cautious about the economy's prospects."

The strength in the commercial sector until now had been offsetting the decline in the housing market. That appears to be changing, though continued growth in institutional construction, such as universities and hospitals, and road construction will provide somewhat of a balance.

All construction spending, including residential construction, is expected to shrink 2% next year, compared with a decline of 8% this year.

There are indications that this summer's credit crunch and the tightening of lending standards will put a damper on plans for real-estate expansion, especially among commercial real-estate developers and companies that are intensive users of real estate.

If the expectations hold true, 2008 would mark the first time since the recession of the early 1990s that overall construction spending fell for two years in a row. Commercial construction currently contributes about half of the overall $1.2 trillion construction economy, according to the U.S. Commerce Department.

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SOURCE: Bloomberg

According to the authors of this article, Dan Levy and Hui-yong Yu, "U.S. real estate investment trusts are poised for their biggest decline in almost a decade as higher borrowing costs curb takeovers and reduce property values."

Property trusts that own office buildings, apartment complexes, hotels and shopping centers are losing value as banks and investors shun bonds and loans backed by subprime and commercial mortgages.

Warehouse and industrial REITs are the only group in the Bloomberg U.S. index that hasn't lost value this year, gaining 11.5 percent as U.S. imports of raw materials and consumer products increased. Public storage REITs dropped the most, down 19 percent. Apartment REITs decreased 13 percent and office stocks declined 12 percent. All returns include dividends.

More than 200 REITs went public since 1991. Today, their combined market value is about $357 billion, according to the National Association of Real Estate Investment Trusts in Washington.

REITs have attracted investors because they are required to pay out at least 90 percent of their income as dividends, avoiding corporate taxes, and their dividend yields have historically exceeded those of Treasury securities. Assets in real estate mutual funds rose to $82 billion as of Sept. 30 from $12.5 billion a decade ago.

Almost half of the 128 stocks in the Bloomberg REIT Index yield less than the 10-year Treasury note's 4.34 percent, making them expensive relative to government bonds, according to Bloomberg data. Nine of the 10 largest U.S. REITs by market value have dividend yields of less than 4 percent.

Confidence in REITs will return once banks resume making loans to finance acquisitions, said James Corl, chief investment officer at New York-based Cohen & Steers Inc., which manages more than $25 billion of real estate stocks. That will show investors that properties have retained their values, he said, adding that six months from now, a lot of this stuff will have been flushed out.

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Are you concerned about the value of your portfolio and your commercial real estate investment strategies in the year ahead? Request your confidential portfolio review from one of the Steelhead Capital advisors today.

SOURCE: Realty Times

Although it has been as hot as the residential market is cool, commercial real estate will slow next year, experts say.

Those experts -- gathered by the Urban Land Institute for their 2008 Emerging Trends report -- predicted that this "healthy correction” would likely bypass long-term investors but penalize late-to-the-game speculators and overleveraged buyers.

Investors and developers surveyed by ULI believe that uncertainty will characterize 2008. They expect capitalization rates to rise and risk to be repriced, with the harshest effects being felt by those who have relied on debt strategies.

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In this article, author Rick Munarriz repeats his earlier speculation that commercial real estate portal Loopnet may be ripe for online giant eBay acquisition.

SOURCE: The Motley Fool

Commercial real estate may not be the safe haven that investors in tattered residential real estate covet, but it's good enough for LoopNet.

The leading online marketplace for commercial real estate listings posted another strong quarter yesterday. Revenue climbed by 47% to $18.6 million.

Commercial real estate has avoided many of residential real estate's pitfalls, but subprime concerns on the residential side are making lenders choosier on the commercial side, too. That is having an impact on the number of successfully completed transactions in the industry.

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While commercial paper fell again this week, its the smallest drop of the recent weeks, giving some hope for a recovery in the not-too-distant future.

SOURCE: Bloomberg

According to the author of this article, Bryan Keogh, "U.S. asset-backed commercial paper shrank for the 11th consecutive week as renewed concerns about debt linked to mortgages roiled credit markets."

Short-term debt maturing in 270 days or less fell $4.6 billion in the week ended yesterday to a seasonally adjusted $883.7 billion, according to the Federal Reserve in Washington. The broader commercial paper market grew $6.2 billion.

The drop, the smallest in five months, extends the worst slump for asset-backed commercial paper in at least seven years and underscores the challenge facing Treasury Secretary Henry Paulson as he attempts to revive the market. The market's size has fallen 25 percent since its peak of $1.18 trillion on Aug. 8.

The Fed's recent half-percentage-point rate cut helped allay concerns that losses sparked by defaults on subprime mortgages may spread further into credit markets. Businesses rely on commercial loan paper, usually maturing in three months or less, for expenses including payroll and rent. Subprime loans are made to borrowers with poor credit.

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SOURCE: Bloomberg.com

Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. agreed to start a fund of as much as $80 billion to help revive the asset-backed commercial loan paper market.

The new company will buy assets from structured investment vehicles, units set up to purchase securities such as bank bonds and subprime mortgage debt, the banks said today in a joint statement. Other finance companies may join, the banks said.

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Mr. Dan Fasulo is the Director of Market Research for Real Capital Analytics and he is scheduled to be a guest speaker on the next Capital Synergies podcast to discuss commercial mortgage rates.

We'll keep you posted!

SOURCE: Financial Week

According to the author of this article, Mr. Frank Byrt, "Credit market woes have barely dented the office-space market, which has been supported by strong leasing. But the lack of demand for securities backed by commercial mortgages could put a lid on deals."

In his upbeat article, Mr. Byrt goes on to explain that despite all the commotion in the residential market and the speculation surrounding the recent interest rate hikes, the commercial real estate sector is alive and well, and banks and life insurance companies “didn’t skip a beat.”

However, because of the lackluster CMBS market, so few property deals closed in September that it will probably be one of the slowest months in several years, according to Dan Fasulo, director of market analysis for Real Capital Analytics, which tracks commercial market transactions.

But because of the heavy deal-making over the first eight months of the year, annual sales have already reached record territory. Year to date through Oct. 1, commercial property sales totaled $370 billion vs. $350 billion in all of 2006.

So it’s a good bet that by year-end, sales will top $400 billion and perhaps approach $420 billion, Mr. Fasulo predicted.

He added that the completion earlier this month of the $22.2 billion Tishman Speyer/Lehman Brothers acquisition of the Archstone-Smith REIT—albeit with the aid of an odd lot of financiers including Fannie Mae and Freddie Mac -- will help boost investor confidence.

“That’s a real bullish sign for the whole commercial sector that a transaction of that size went through even during the credit crunch,” Mr. Fasulo said. “It was a shot of adrenaline” for the marketplace.

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