Record Commercial R.E. Spending in ‘05

Even as the profitability on U.S. real estate is shrinking due to soaring prices paid for buildings and slowly-rising interest rates, investors will spend $200 billion - a new record - on commercial property this year, according to a survey done by Cushman & Wakefield, a real estate services firm, at an industry gathering in San Francisco.

Despite cooling signs attributed to the real estate market on the residential level, foreign investors, private equity companies and pension funds still see it as a stronger investment than traditional avenues. Since 2000, stocks, bonds and similar options have been viewed as volatile by a legion of investors, and data suggests they are right. The value of the National Association of Real Estate Investment Trusts index, according to the survey, has gained more than 20 percent in the last five years, an extremely healthy return. The Standard & Poor’s 500 index, meanwhile, has fallen 3 percent.

It has been a record growth year for San Francisco, with over $4 billion in closed property sales, second only to New York City. However, home skeptics warn that this market will soon come back to earth, too. Ken Rosen, a real estate and economics professor at UC-Berkeley, said that despite the huge amounts of money flowing into commercial real estate, publicly traded real estate investments are overvalued and due for a fall in the next two years - perhaps a decline of up to 20 percent.

Rosen noted that San Francisco would need to create 15,000 new jobs to “feel healthy” about the current market growth, and that only 8,000 jobs were totaled last year. He said that an 8 percent office vacancy rate and average rents of $50 per square foot are benchmarks for a healthy commercial real estate market, and the current figures are nowhere close. The city’s office vacancy rate at the end of September was 16.5 percent, according to the Cushman & Wakefield, survey, with prime office rents at $31 per square foot.