Real Estate Overseas Could Affect U.S. Market.

Commercial real estate markets are likely to continue to benefit this year as good economic growth is accompanied by declining vacancies for different property types. That likely means fewer delinquencies for servicers to deal with. Two different research sources offer two perspectives on the outlook for the commercial real estate sector this year.

One of them, the University of Southern California Lusk Center for Real Estate, is concerned that developers might start projects that increase supply in some markets. Another event to watch for is that some global investors could increase their investments in Asia and Europe in order to get higher returns than in the U.S.

Stan Ross, chairman of the board of the Lusk Center believes that "investors will stop signing blank checks" and sees this as a "healthy sign for property markets." He added that investors have traditionally continued to pursue real estate opportunities in the face of signs that property values were leveling off.

And Stuart Gabriel, director of the Lusk Center, believes that while foreign and U.S. investors are continuing to acquire properties, they are showing more discretion. "On the residential side, flipping of properties has come to a virtual halt as markets have cooled," he said. And on the commercial side, investors have bought properties and sold them after a holding period, hoping to realize capital gains.

For 2006, Mr. Gabriel believes that investors will focus on "bond-like investments." He identifies these as "well-located properties that provide steady cash flows as well as capital preservation and competitive returns."

While the Lusk Center expects capitalization rates on commercial properties to go up in 2006 as interest rates rise, they believe that properties will also generate higher operating incomes, which will offset the higher capitalization rates, which means that investors will get similar yields. They expect commercial property markets to benefit from strong economic growth, increased demand for space, a decline in vacancy rates and rising rents.

Another source, Prudential Real Estate Investors, Parsippany, N.J., believes that as commercial properties appreciate at a slower pace this year, total returns from real estate investments will begin a slight decline in 2006. In a market report, the real estate investment division of Prudential Financial says that returns on "private, unleveraged ...