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Seventh Heaven For U.S. Commercial Real Estate Market

Has rational exuberance replaced cautious optimism? A new survey of investor sentiment finds that spiraling demand for commercial real estate should persist through at least the end of 2007, driving asset prices beyond their current record levels.

On Monday, Chicago-based law firm DLA Piper released findings from its 2007 “State of the Market” real estate survey. The survey, last conducted in September 2005, polled 2,400 U.S. senior real estate executives.

Most respondents expect commercial real estate fundamentals to continue firming up over the next few months. A full 78% of respondents described their 12-month outlook for commercial real estate fundamentals as “bullish.” By comparison, only 43% of respondents felt “bullish” about the near-term market fundamentals in September 2005.

“The survey results are really consistent with what I’ve been hearing. Investors are still extremely confident that the commercial real estate market will remain strong,” says Jay Epstien, chairman of U.S. real estate at DLA Piper. “We are now in a six-year long expansion cycle that’s getting long in the tooth.”

Most of the survey respondents cited sustained growth in the U.S. economy as the primary reason for their optimism. Nine out of 10 also expect the public to private M&A trend to continue through the end of 2007. Nearly 90% of the executives from public real estate companies expect the M&A trend to continue while 92% of executives from private companies held that view.

One respondent wrote: “REITs will probably become the subject of more takeovers as investors seek to unlock their value.” Only 5.84% of the executives expect the public-to-private M&A trend to slow down this year. This finding carries added weight given that 79.5% of the respondents work for private companies.

With heated demand for portfolios comes yield compression. Despite an already steep decline in cap rates during the past few years, 10% of the executives believe that caps will continue to fall in 2007. But cap rates are notoriously difficult to predict. In the 2005 survey, for example, roughly 90% of respondents believed that caps were about to head upwards.

Some sectors stood out in the survey. Most executives singled out the multifamily market as the most promising for investment. Roughly 25% of respondents chose the multifamily market as the most attractive sector for investment in 2007. Downtown office came in second with 22% of the vote, followed by hotel and retail at 13.65%. The least popular sector for investment was suburban office, which only 9.49% of the executives viewed favorably.

“This data supports a broader comfort level with commercial real estate investments built upon the perception that there is an overabundance of capital, cheap debt and near insatiable desire to deploy this capital quickly,” says Epstien. To view the full report:

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