US COMMERCIAL real estate will perform better than the country's volatile sharemarket during the current economic downturn because investors value its intrinsic quality, according to a new CB Richard Ellis report. The study analysed the effect on commercial real estate of the US economic slowdown, the S&P downgrade of the US credit rating and turmoil in the global financial markets.

''While we anticipate continued stockmarket volatility, commercial real estate will not fare as poorly because it remains a preferred asset class, within a well diversified multi-asset institutional portfolio,'' said Asieh Mansour, CBRE's head of Americas Research.

Investors would react depending on their attitude to risk, said the report, which Dr Mansour wrote with CBRE's global chief economist, Dr Raymond Torto.

''Investors with higher risk tolerance will look for opportunities in volatile markets while more risk-averse investors may delay new transactions.''

The report found that early signs indicated a withdrawal of capital from the commercial mortgage-backed security market, with spreads widening. However, there was still ample supply of capital for core deals.

''Lending rates should stay relatively low, with loans conservatively underwritten with stricter covenants. The more risk-averse capital will look for core, income-producing assets in primary markets to satisfy demand,'' the authors said.

The report said real estate fundamentals changed more slowly than real estate values and debt availability. ''However, we may see a postponement in tenant expansion or relocation decisions. New development will have more difficulty getting off the ground.''

The nascent recovery in property market fundamentals would be badly affected if the poor business and consumer confidence continued. ''Leasing volumes are expected to slow, and the recent improvement in key performance metrics - absorption, occupancy, rents - should lose the momentum evident in the first half of 2011,'' the authors said.

With heightened uncertainty, transaction volume may slow, and both sellers and buyers may sit on the sidelines to assess the situation. Pricing metrics for real estate assets would be less transparent as valuation metrics may become more difficult to underwrite.

''Reduced investor confidence will cause a rotation towards least-risky assets and increase demand for core assets in primary markets.

''Assets further out on the risk spectrum - secondary markets, peripheral locations, value-add 'plays' - will be less desirable until … uncertainty is reduced.''

The report said the multi-family sector should be the least affected fundamentally by any slowdown and should benefit from increased investor risk aversion. ''However, deal structure will be an issue and riskier opportunities will be more difficult to transact,'' it said.