Deloitte & Touche: No Bubble to Burst in Commercial

In the real estate industry there's always talk about the real estate bubble and discussion about if and when the said bubble is going to burst. Although this type of speculation makes sense for the residential real estate market, a report released by consulting firm Deloitte & Touche USA reveals that such speculation for the commercial real estate market is not quite justified.

Deloitte's 2006 outlook report on the real estate capital markets states that, although there could be potential problems ahead, there are no major signs that the commercial real estate market will take a drastic downward turn in 2006.

According to the report, one of the reasons for this is that there is no bubble to burst in the commercial real estate market in the way there is in the residential sector.

"There's this conception that commercial real estate has the same bubble that residential real estate has, but there's no bubble to burst. It's a misconception. If you look at the underlying demand factors, they've been declining for the last four years. The one problem is that values continue to go up. In spite of the fact that fundamentals are getting worse, in the past four, five years, people have fallen in love with commercial real estate, and it's driven up prices. But even at that, they're not astronomically off the chart high," said Dennis Yeskey, a principal at Deloitte and author of the report.

Mr. Yeskey also pointed out that commercial real estate is more stable because there isn't the construction boom in the sector the way there is in the residential market. The demand for constructing new office buildings is not nearly as high as the demand for building homes and condos.

"You see a lot of condos being built, but you don't see a lot of office buildings being built, you don't see a lot of warehouses being built. The construction price is up 20% to 30%. You haven't had the demand for building new offices in the way that the residential market has," he said, adding that residential building has been overdone.

Deloitte expects that investors will receive more of their returns from income rather than appreciation this year as capitalization rates "soften" in certain sectors.

Creative investors are seeing opportunity in some niche markets, such as healthcare-related properties, time and resort shares and second-family homes.

The report asserts that the economy seems ready for continued positive growth in 2006. Interest rates remain low and are not increasing as quickly as expected. There are no clear signs that the commercial real estate market is ready to take a drastic turn downward. Although this market has worked, historically, in a cyclical pattern, investors hope that 2006 will have a "soft landing" to minimize any negative effects.

Despite all this good news, however, Deloitte's report warns that there are still a number of concerns on the horizon, especially with the budget and trade deficits, selected residential "bubbles," post-Hurricane Katrina, Rita and Wilma impacts, and the war in Iraq.

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