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Saturday, September 22, 2012

Fed May Drive More Investors Into Commercial Real Estate

The Federal Reserve’s decision to buy more mortgage-backed securities from Fannie Mae and Freddie Mac could impact more than just the housing market.

So-called QE3 (quantitative easing) could drive more investors to commercial real estate, in the great hunt for yield.

"If history is a guide, we could expect additional near-term price gains for riskier assets, at least for a few more months," said John O'Callahan of CoStar Group, a commercial real estate information company.

Fed May Drive More Investors Boise Valley Commercial Real Estate for Lease Office, Industrial, and Retail
(Photo credit: mrshife)
O'Callahan notes that during QE2, in 2010, when the Fed bought long-term U.S. Treasury bonds, “prices of equities and high-yield bonds, including riskier CMBS (commercial mortgage backed securities), gained a respectable 12 percent to 25 percent.”

Analysts at Fitch ratings wrote that QE3 could also have a positive influence on real estate investment trusts (REITs).

"If the plan maintains or causes a decline in long-term U.S. Treasury rates, we would expect a drop in all-in borrowing costs for REITs. Lower long-term rates could also entice investors to allocate to REITs."

One thing to remember, though, is that commercial real estate prices are not what they were during QE1 or QE2, so the yield hunt may be tougher.

“Asset values have rallied since that time and equities and commercial properties (at least in good markets) are already expensive and have less room to increase in value than they did during QE2, and interest rates are already so low,” noted Ryan Severino, senior economist at Reis Inc.

He claims additional steps would have to occur, namely, “If QE3 did spur an increase in equity values, investors and companies would be in a stronger financial position, and this could spur a bit of a wealth effect.”

That, he claims, would push more investors to expand their business, which could impact commercial real estate more directly. Companies would hire more people and need more office space. If consumption increased, retail space could benefit as could warehouses that store retail goods.

Over at Greystone, a financial services company that originates financing for multi-family and healthcare properties, CEO Stephen Rosenberg seems more convinced of impending commercial demand.

"We're going to start stepping on the gas and hiring more underwriters, processors, originators and add to our legal team," he said.

Rosenberg added that even if rates don’t keep coming down, there is now considerably more confidence that they won’t go up.

—By CNBC's Diana Olick
—Realty Check producer Stephanie Dhue contributed to this post

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