Despite the S&P’s one week flip flop on the rankings of commercial mortgage-backed debt for three bonds sold in 2007 (Bloomberg), financial analysts warn that commercial real estate has a rocky road ahead. Investors in unlisted REITs are likely to suffer most because in many cases they are now locked out of selling and reliant on the issuer to accurately and objectively value their illiquid assets.
Commercial property vacancies are up and rents are down, and CreditSights‘ REIT analyst Craig Guttenplan says lurking danger in the future for REIT investors will come in the form of expiring leases coupled with those falling rents.
Guttenplan writes: “Despite our expectations for a bottoming of (Commercial Real Estate) fundamentals in 2012 or 2013, we note that rental rates should remain at depressed levels for the subsequent few years relative to the recent boom period as fundamentals slowly strengthen.”
Compounding that negative outlook are additional commercial property vacancies that will no doubt follow bankruptcies due to the current economic climate.
“(T)enant bankruptcies can speed up the lease expiration timetable and force space that was once considered occupied for the longer-term back on the market,” Guttenplan writes.
Though publicly-traded REITs have seen a slight rebound thanks to shoring up their equity and eliminating some debt, the big picture for unlisted REITs is still dark (and going public decisions are often tainted by a big potential payday to the issuer through the sale of the management company to the new public company as part of the deal).
Investors, especially those facing retirement soon, are most at risk. And brokers and brokerage firms who sold them the unlisted REITs won bigger commissions at the expense of investors who can have little faith about the value of their investments and can’t sell to escape falling values.
The Vernon Litigation Group law firm is investigating claims on behalf of investors surrounding misrepresentations about the safety and liquidity of unlisted REITs and the suitability of marketing of these products to certain investors, including older, risk-averse investors.