Commercial Property Investment Up 28%

Investment in U.S. commercial properties rose 28% in the first quarter, more than analysts expected. But the market shows signs of cooling off.

Investors acquired $17 billion of offices, warehouses, apartments and other properties, up from $13.3 billion in the first quarter of 2000, according to the study by property brokerage firm Grubb & Ellis Co.

“We’re still seeing capital in the market,” said Robert Bach, director of research at the Northbrook, Ill.-based company. “It’s not like the capital crunch of late ’98 and early ’99 when the level of sales really fell.”

With the U.S. economy growing at half the pace of the prior four years, companies such as WinStar Communications Inc. and Yahoo Inc. are firing workers and giving up office and warehouse space. Also, retailers such as Montgomery Ward are closing stores as consumer confidence drops.

Real estate investors, however, believe the property market is in much better shape than the early 1990s, the last time landlords suffered as the economy slowed.

At less than 10%, the nation’s office vacancy rate is below the 15% it reached in the early 1990s, development is still below demand in many areas and banks have tightened underwriting criteria.

There are signs, however, that sales in the future may be less buoyant than in recent quarters. Total investment was off 9% from the fourth quarter, according to Grubb & Ellis.

Many of the transactions that were completed in the first quarter were set in motion in 2000, before the economy started to slow and job cuts mounted, Bach said.

And with stock prices down, pension funds, big buyers of real estate in the past, no longer find themselves under-allocated to real estate. Also, buyers are requiring higher yields on properties “due to perceived increased level of risk,” Bach said.

As a result, it’s harder for sellers to find buyers willing to meet their asking price, and some are pulling properties off the market, choosing to refinance instead.