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CRE portfolio managers see market turnaround in 2012

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The commercial real estate market has bottomed out and is poised for growth, barring an unforeseen crisis or a decline in employment gains, Forward Management said in a white paper.

Analysts at the investment and advisory firm said CRE fundamentals are outperforming residential real estate, and real estate investment trusts could attract more investors in the year to come.

"We are big believers in investing through publicly traded REITs and real estate development or operating companies," said Joel Beam with Forward Management. "The first reason is liquidity, which you don’t get with limited partnerships or private REITs."

He said analysts also enjoy the predictability of REIT cash flow and the fact these companies distribute 90% of their taxable income to shareholders. Still, the two main factors driving optimism for the sector are abysmal growth in new construction, which is limiting supply, and increased demand for CRE, the Forward Management team said.

The firm cites data showing CRE supply growth (or new construction in the segment) remained well below 1% during the past two years. Comparatively, in the early 1980s, CRE development reached all-time highs, with the supply-growth rate hitting 7% in 1985. The growth rate is not expected to surpass 1% again until 2015.

Demand for these properties also is picking up with net operating income from CRE properties rising 2.4% in 2011, up from near zero to negative growth in 2010 and 2009, the report said. Foward Management predicts income from commercial properties will continue to climb, eventually reaching a 3% growth rate in 2012.

Still, a CRE rebound is not forecasted for every part of the country.

"By no means is a recovery happening in every market," said Ian Goltra, a portfolio manager with Forward Real Estate Portfolio Management.

"But in gateway cities like New York, Washington and San Francisco, we're seeing a growth in demand and little or virtually no new supply. We can see it happening right in the vicinity of our San Francisco office. As of October, buildings in the city's financial district were being quoted at a rate 70% higher than the leases signed less than two years earlier. We’re also seeing healthy commercial market activity in Silicon Valley and other tech corridors."

How fast CRE improves in a marketplace is widely contingent on local job growth. Forward Management expects cities like Dallas and Austin, Texas; Boston; Washington; and Raleigh, N.C., to return to peak employment levels by the end of this year, while other areas may not see it until 2013 and beyond.

Write to Kerri Panchuk.

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