Office buildings lead the pack in investment market.

Office buildings nudged out other commercial real estate property types as investment vehicles in a national market that has been battered by unprecedented natural disasters, rising long-term interest rates and declining capitalization rates, a national report revealed.

According to survey data released in the Fourth Quarter RERC/CCIM Investment Trends Quarterly, offices were the only property type to score a higher "investment conditions rating" in the July through September period than in the previous three months. Institutional survey respondents rated central business district offices at 6.4 compared to 5.6 in second quarter, and suburban offices scored 5.7 compared to 5.4 (The RERC rating system uses a 1 to 10 point scale to project the investment viability of a property type based upon past market conditions, the national economy, the job market, available capital, interest rates and other factors.)

Nationally, office properties captured 40.8% of the dollars spent in third quarter and accounted for 34.1% of the total number of deals. The pretax yield or internal rate of return for central business district office properties was 8.4% and 8.9% for suburban properties.

Results for apartments were disappointing, as the sector's investment rating dipped 30 basis points from second quarter to 5.4. Apartments have the lowest required capitalization rates of all major property types. In the third quarter, the required going-in capitalization rates declined 40 basis points, while required terminal capitalization rates declined 30 basis points.

"Some respondents thought apartments were still a good investment, while others cited apartments as the worst investment type because they are overpriced, have little growth potential and could be at a risk for major price readjustment if the condominium conversion market fails," said Kenneth Riggs, president and CEO of Real Estate Research Corporation.

An independent research survey conducted in the third quarter by RERC showed a significant increase in the number of first-time buyers of commercial real estate. Of the more than 200 commercial professionals surveyed, two-thirds worked with investors making their initial entry into the commercial market. Retail properties led the pack, followed by apartments, offices and land. The most commonly used ownership structures were, in order of preference, individual investors, owner-users, joint ventures, tenants in common and limited partnerships.

The Fourth Quarter RERC/CCIM Investment Trends Quarterly also revealed that hotels were high on the preferred investment list.

"Hotels continued to hold investors' confidence, charting the only double-digit pre-tax yield at 11.3%, a quarterly dip of 20 basis points. The median price per room jumped to $131,900 in third quarter from $117,00 in the previous quarter. Hotels continue to be the most volatile property type," Riggs said. "But most of the volatility over the next five years is expected to be on the upside."

"The pre-tax yield for the three major retail categories, regional malls, power centers and neighborhood/community centers, fell 30 to 40 basis points in third quarter, and the required and terminal cap rates declined 40 to 50 basis points. Still, consumers continue to spend despite a reduction in discretionary income. Retail properties garnered 17% of all sales in the survey, a one percentage point dip."

Despite slightly lower investment rating conditions, warehouse and R&D sales have been robust, with transactions through September 2005 reaching $25 billion, twice the volume when compared to the same period in 2004.

Transaction data in the Fourth Quarter RERC/ CCIM Investment Trends Quarterly was based on a quarterly total of 2,366 closed transactions, with a value of $76.5 billion. The data about the sales was provided by CCIM members, RERC contacts in the marketplace and public information sources.