The uncertainty caused by a potential war with Iraq appears to be leading to instability in the economy, but some industry experts say a few bright spots remain as far as commercial real estate investment is concerned.

“Right now, there seems to be a general distraction in the market,” said Michael Siegel, executive managing director of Insignia/ESG in Stamford. “Whether it’s at a CFO or CEO level, any decision-maker that’s deciding to commit a company in a lease scenario is most definitely looking at the world situation in terms of how it will affect the company. A lot of companies are pretty much in a holding pattern and there doesn’t seem to be a lot of moves driven by an increase in new hires, that’s for sure.”

The opposite side of that viewpoint, however, is that commercial real estate – from an investment standpoint – still remains a venue for decent yields and low risk and therefore a refuge for both private and institutional investors in these uncertain economic times.

“The money that’s out there is not running and chasing after Wall Street, but chasing good solid real estate investments instead,” said Siegel. “It’s fairly obvious that investors see a greater return regardless of what’s going on in the world. Returns are such that [real estate] makes a lot more sense to investors than CDs or bonds. There’s no question that there’s less risk going into real estate.”

Steve Witten, senior director of Marcus & Millichap’s National Multi Housing Group, explained that discretionary spending currently is down.

“People aren’t going out and buying large boats and other superfluous items. We’re just not spending right now, and I think this is because of the uncertainty,” said Witten. However, he noted that both private and institutional investors are still purchasing buildings.

“People are buying these because of the fact that they are generating superior yields,” said Witten, remarking that a lack of alternative investments has been fueling real estate investments as well.

Witten said that type of investment is going to continue because “these people are still sitting with their money looking for attractive returns.”

Siegel noted, “I’ve been in this business through Desert Storm, Vietnam and several other conflicts. If this explodes into a full-scale global situation, then certainly there’s going to be all kinds of distraction and concerns. But it’s only when the consumer stops spending that we have a domino effect which could affect our industry.”

‘Seller’s Market’

Witten said the fact that the United States is in limbo right now is the real issue, adding that if a decision on war was made either way there would be an impact in the market.

“Once a definitive decision is reached one way or the other, and the stock market starts to improve, and the country starts to focus on the core economy, real estate values may be affected because what has driven these values are low yields,” he said.

He explained that there is an inverse relationship between yields and values.

“Improvement [in the economy] will basically create dollars coming out of the real estate investment market. If I’m selling a property today and a firm is willing to accept a 7 percent yield, I could sell it for more than if the same buyer wants an 8 percent return,” said Witten.

He believes that private investors will remain in the market, adding that larger institutional investors will most likely be looking to diversify their portfolios.

Paul Rodia of Drubner Industrials in Waterbury said, “The effect I see at this point is that until something happens one way or the other people are postponing decisions until they see which way the wind will blow. There is a lot of uncertainty, and it’s not the good news or bad news, it’s the no news causing the lull in activity.”

He added, “Many people I speak with don’t seem to fear this long-term, or the outcome. It’s the fact that we don’t know what’s going to happen that’s causing the postponement in decisions.”

Tom Hill, also of Drubner Industrials, said, “We’re all lucky here in that we had a lot of business already under contract. It’s not as though things have come to a screeching halt. We’re just not seeing the level of activity we were experiencing six to eight months ago.”

Siegel said a main driver in business expansions and relocations is new hires, and that here simply hasn’t been that much action on that end this quarter, due in part to the uncertainty of war. However, he said the moves within the market that do exist he referred to as “opportunistic.”

“Tenants facing lease renewals are taking advantage of the situation because the rents they’re currently paying are significantly higher than that which they can renew for or find a new location, so the market has swung toward the tenant,” said Siegel.

For example, buildings in Fairfield County with asking rents in the high $40-per-square-foot range, have lowered asking rents to the high $30-per-square-foot range. According to Siegel, that has sent a positive message to tenants that landlords are willing to make deals.

He noted that is particularly true of sublease space where often sublease holders “want to cut their losses and get the space full.”

“The consensus appears to be that right now our discretionary spending is down and the assumption is that we’re confused, asking, ‘What direction is this going?’ [and] ‘Are we going to war?’ so I feel that a lot of this is psychological,” said Witten. He added that any decision from Washington would provide a catalyst for business to move back toward normal operation.

With an increase in interest rates and improved performance from the stock market, the real estate market may no longer be “the best deal in town,” according to Witten, and the yields would increase in order to remain competitive, forcing lower values.

“This is an extraordinary seller’s market, and if you’re looking to sell your property in the next nine months, is the time to do it,” he said.

“It’s really hard to tell what’s going to happen this year. All the predictors are basically taking a ‘wait and see for ’03’ stance,” said Siegel.

“Like any other segment of the economy, some portions [of the real estate market] are a little softer than they might have historically been, but yields unquestionably outperform any other investment vehicle right now,” said Witten.

He added, “The lack of financially attractive alternative investments has driven many institutional buyers to the apartment market. This factor, combined with low interest rates has driven property values to an all-time high. The likelihood of war and an improving economy suggests that interest rates may begin to creep back up. Once that occurs and there is improvement in the stock market, yields for investment properties will increase, affecting demand and value.”