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[ILLUSTRATION
Buoyed by low interest rates during the last few years, we watched as record-level home sales and new construction, along with loan refinancing, helped pull the U.S. out of a recession. GDP grew, employment grew, and as a result, in 2004, soaring home values and rising stock prices drove the wealth of American households up by 9% to a record $49 trillion, states the Federal Reserve.
With consumers spending even more and businesses growing and finally beginning to occupy more space, record levels of capital flowed to the commercial mortgage markets in 2004. In fact, real estate was among the biggest mutual fund winners in 2004, earning 32% returns on average for the year. This was the fifth consecutive year that public real estate investment trusts (REITs) outperformed the major stock market indices, reported Lipper.
Although private real estate returns are decreasing, real estate returns overall remain less volatile than stocks, and as shown in Table 1, are outperforming those for other investment classes. As such, demand for real estate remains high, with pension funds, endowments, foundations, and individual investors boosting their investment in commercial real estate.
COMMERCIAL MARKETS REFLECT BUSINESS AND CONSUMER TRENDS
The Federal Reserve indicates that it will continue to raise the federal funds rate and to monitor the rate of inflation. The fear is that an increase in interest rates and inflation, along with high fuel rates and a slowdown in consumer confidence, will slow consumer and business spending, and that the real estate recovery--now off to a solid start-will stall. However, real estate's propensity to lag the economy is also one of its most stabilizing features. Since most commercial real estate properties do not move on a moment's notice, there is...
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