Improvement Costs Cut Commercial Returns
Commercial real
estate investors and owners should expect yields on their investments to
keep falling due to capital expenditure (cap-ex) leakage--the money
landlords spend on building improvements and concessions--according to
LaSalle Investment Management's latest quarterly research report.
"Cash flow from [commercial] real estate may have further to fall for
investors because leasing costs and concessions will need to rise if
landlords want to maintain high occupancies," says Jacques Gordon,
international director, investment strategy at LaSalle. Gordon added that
retail buildings had the highest cap-ex leakage of all commercial property
during the first quarter--particularly because retail landlords are sprucing
up entryways, common areas, signage, and shuffling more tenants than other
sectors.
Taking the leakage into consideration lowered the sector's yield by 2.3
percentage points to 6.42 percent for the 12 months ended March 31,
according to LaSalle, from 8.72 percent yield reported by the National
Council of Real Estate Investment Fiduciaries--which tracks $124 billion of
commercial real estate. Gordon predicts it will take at least two to three
years for vacancy rates and cap-ex leakage come back down.
Source: Wall Street Journal
(05/28/03); Smith, Ray A.
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