- The Washington Times - Thursday, February 12, 2004

Investors are continuing to throw money at commercial real estate, despite large chunks of empty space and dropping rates of return.

Boston real estate advisory firm AEW Capital Management said a strong stock market has given many institutional investors extra cash, and they are not afraid to spend it on large, often overpriced office, industrial and retail buildings.

“The commercial real estate market presents an interesting paradox of generally poor property fundamentals and exuberant investor interest,” said a report from AEW, released yesterday. “Capital flows into the sector have never been stronger.”

Office vacancy rates, in particular, are close to their highest levels since 2000. Nationwide, the average office vacancy rate is about 16.9 percent, up from 8.3 percent four years ago.

But that hasn’t stopped investors from looking for buildings. Between November 2002 and November 2003, institutional investors sought $4.4 billion in commercial real estate, a 22 percent increase from the comparable period a year earlier, according to Institutional Real Estate Inc., a real estate consulting firm in Walnut Creek, Calif. Investment in real estate mutual funds also reached $4.4 billion in 2003, its highest level since 1997, AEW said.

Investors in commercial space appear willing to accept lower rates of return. Capitalization rates, or the rate of income compared with the price of a purchased property, have dropped nearly 2 percent in the past two years. Part of this stems from high vacancy rates, but also from high prices resulting from competition for properties.

Typical investors like pension funds and large companies are now accompanied by smaller investors such as charitable foundations and endowments, many of which have deep pockets, AEW said.

Investors have been willing to accept lower rates of return on commercial real estate because they still offer higher returns than basic bank accounts, bonds and Treasury notes. And real estate has historically been more stable than the stock market.

Analysts said they do not expect the flow of capital to real estate to slow anytime soon. Many investors believe that real estate fundamentals have bottomed out and will improve this year. Plus, new investing rules overseas are expected to allow foreign investors to pour more cash into U.S. real estate. Japan, for instance, recently permitted investors there to buy shares in U.S. real estate stocks. And German investors are expected to continue investing in U.S. real estate after the German government increased the amount of money certain pension funds can invest overseas.

In other news

• Prudential Real Estate Investors paid $95 million for 2100 M St. NW. Cassidy & Pinkard represented the sellers, the Bernstein Companies and LMH.

• District planners selected Donatelli & Klein to redevelop land near the Georgia Aveenue-Petworth Metro Station. The Bethesda-based developer is expected to build more than 100 units of housing and 17,000 square feet of retail. About 20 percent of the housing will be designated as affordable, and Donatelli & Klein has proposed financing that will not be subsidized by the District.

Property Lines runs Fridays. Tim Lemke can be reached at [email protected] or 202/636-4836.

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