Grubb & Ellis Economist is "Pretty Optimistic" on CRE

Robert Bach, senior vice president and chief economist at Grubb & Ellis in Indianapolis, addressed the Wichita Independent Business Association's annual meeting at the DoubleTree by Hilton Wichita Airport this week to discuss the current state and outlook of commercial real estate. "Overall, I'm pretty optimistic about commercial real estate markets," he told roughly 200 people gathered for the meeting.

The Wichita Business Journal reports that according to Bach, commercial real estate struggled during the recession, with average prices falling by 44 percent between October 2007 and October 2009. However, the market has significantly improved since then, he said, and returns for commercial real estate investors are fairly attractive in the current low-interest-rate environment.

Bach predicted that cap rates will drop this year which, along with slowly increasing rents across sectors, would have properties throwing off more income. He noted that lower prices have enticed tenants to take advantage of the opportunity to upgrade at lower prices, and that industrial space has performed well in the face of manufacturing growth and years of improved efficiencies.

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Eurozone Worries Impact South Wales Market

Jones Lang LaSalle released its South Wales Report 2012 noting that "Eurozone worries" hit market confidence, leaving them to describe the 2011 market as disappointing. The performance of the Welsh property market over the next year is likely to be influenced by the market’s reaction to new policies. An excerpt from the report:

Commercial property markets mirror economic uncertainty

Sentiment has been on the slide for most of the last six months and this has impacted on UK property markets. Investors and occupiers have become more cautious according to the latest data. This has not been helped by a further squeeze on bank financing, particularly at the height of the Eurozone crisis last year. It was not a major surprise therefore, that in late 2011 IPD announced the first decline in UK commercial property values in over two years.

These subdued trends are set to continue in early 2012. For occupiers, decisions are likely to be delayed as long as the economic outlook is uncertain. Until a clear upturn commences, cost-cutting, not space expansion, will dominate. The short-term outlook for investment volumes is also weak, with activity propped up by equity buyers, such as private and sovereign wealth.

As the economy becomes more supportive, there will be a revival in occupier demand. With caution still the keynote, this will be driven by structural events or pre-lets in a market starved of quality supply. A recovery in risk appetite will also lift investment activity, notwithstanding ongoing shortages of debt finance. The thaw is expected to be gradual with core assets in safe havens, such as London offices, benefitting first – a trend we have seen to date.

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Fragile Recovery for Home, Investment Markets

While the February home sale figures dip, home sale statistics are affected by the economy underpinning them, generally several months preceding the home purchase decision, and the closing several months later.
Therefore the associated sale and pricing figures are lagging indicators by 3-4 months or so.

With this in mind we are now seeing stronger investor interest as recent employment rates improve and the outlook for the residential market demand improves.

This coupled with a bit more flexible bank lending policy for home mortgages
suggests an improving outlook for US home sales and a stabilized pricing
environment.

Bodes well for investment in the US residential market.  Though I'd term it a
fragile recovery, that could easily lose traction if global economies, with a particular eye on Europe, retreat throwing US employment figures negative.

PWC Survey Results: CRE Market Picking Up

PricewaterhouseCoopers' first-quarter report, which surveyed U.S. real estate investor confidence, shows that the commercial real estate sector is expected to remain in recovery mode in 2012, but added that the market for distribution and industrial real estate will likely become one of the hottest CRE sectors between 2013 and 2015. According to a Wall Street Journal report, real estate executives who responded to the survey said they expect investor interest in those properties to grow with an expansion of the economy and consumer spending.

The retail outlook, however, is a little more bleak. "There's been a total paradigm shift in retail,"Mitch Roschelle, who heads PwC's real estate advisory practice. "Big box stores are being replaced from the consumer's perspective by online shopping…and too many retailers are competing with each other's sticks and bricks stores."

Nationally, more buyers are considering the rebounding industrial sector, as it demonstrates positive signs of recovery, reported the South Florida Business Journal. Warehouse demand is increasing rapidly, especially in coastal markets with international port access, according to the report.

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RER Q2 Survey Shows "Slow and Uneven Recovery" in CRE Market

The Real Estate Roundtable has released its findings from the latest quarterly “Sentiment Survey” of senior commercial real estate executives which suggests that absent strong improvement in U.S. job markets and demand for business space, the nation’s commercial real estate sector will likely continue its slow, “bifurcated” recovery over the coming year. The survey collected market opinions from over 110 senior real estate executives, including CEOs, presidents, board members, and other executives from a broad set of industry sectors including owners & asset managers, financial services providers, and operators & related service providers. The full report can be read here.

"It's all about jobs," said Roundtable President and CEO Jeffrey DeBoer. "Individual segments of the market may be recovering, but until private sector job creation picks up, we will not be out of the economic danger zone. The huge pipeline of maturing commercial mortgages and large fiscal issues facing state and local governments are additional 'headwinds' that could impact recovery in the broader economy and commercial real estate. The flatter trajectory we're seeing in the Q2 Sentiment Index is a reflection of these ongoing economic risks and uncertainty."

"Congress needs to help bridge the massive 'equity gap' between today's diminished property values — particularly in second-tier markets — and the high levels of debt that must be refinanced and paid off," said DeBoer. "Policy action is also needed to make the nation more competitive on a global level. Until that is achieved, industry optimism will remain dampened due to economic weaknesses that remain far from resolved."

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EU Commercial Market Showing Signs of Recovery

A new article from the Wall Street Journal titled "Heavy Weather: The European property market is finally emerging from its recessionary deep-freeze, but there are still plenty of icy patches for investors to slip on" takes stock of the current commercial market conditions in Europe. The article notes that prices in the U.K. fell 44.2% between July 2007 and July 2009, according to Investment Property Databank. And according to CB Richard Ellis Group, investment volumes in Europe as a whole fell from the record high of €256 billion ($350 billion) in 2007 to €73 billion in 2009.

"Two years ago we were looking down the edge of a cliff," said Robert Noel, managing director of the London portfolio at Land Securities. "We are now buying into a recovery and there is not enough office supply to meet the demand."

"The market had been picking up, partly thanks to banks lending again," said Eric Sasson, who heads up the European operations at The Carlyle Group, the private equity firm. "But the Greece crisis put a hold to that. Having just got out of the freezing zone, banks went cold again – and some deals got delayed."

"There was a massive globalized real estate market in 2007," says Pierre Vaquier, chief executive of AXA Real Estate Investment Managers. "But then afterwards there was a 'flight to home' – as people wanted to go where they understand best."

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NAR Says Vacancy Rates to Decline, Rent Recovery Delayed

The National Association of Realtors has released its latest Commercial Real Estate Outlook with projects for the real estate markets and indicates that there's a stabilizing trend underway in the commercial real estate markets. From the first quarter of 2011 to the first quarter of 2012 NAR expects that the vacancy rates will decline 0.5% in the office sector, and that office rents are forecast to fall 1.8% this year "before turning higher by 4% in 2012." Lawrence Yun, NAR chief economist, suggested that a pullback in construction is helping to stabilize the market. "Very limited construction of new commercial real estate over the past few years has essentially fixed the supply of available space," he said. "This means vacancy rates could fall quickly from any increase in demand for commercial space."

A summary of the Office Markets outlook:

• Vacancy rates in the office sector are forecast to decline from 16.5% in the first quarter of this year to 16% in the first quarter of 2012.
• The markets with the lowest office vacancy rates currently are New York City and Honolulu, with vacancies in the 8-9% range.
• In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, should be 14.5 million square feet in 2011.

For more news and information visit Blumberg Capital Partners.

New Report Shows Office Market Growth Trend

Cassidy Turley released a new report this week on the U.S. office market showing a positive growth trend after bottoming in the first quarter of 2010. Kevin Thorpe, Cassidy Turley’s chief economist, said that "the sustained improvement in demand for space, now spreading beyond the largest metros, coupled with tightening vacancy is certainly encouraging. However, the employment situation does not inspire robust projections for 2011. The U.S. economy is on track to build on the growth in 2010, but the U.S. office sector is still a minimum of 18 months away from a balanced market."

The office market showed signs of progress in 2010 as new lease deals added up to 80,000 square feet of positive absorption, compared to a loss of 418,000 square feet in 2009. According to Cassidy Turley, the national office vacancy rate fell 10 basis points in the fourth quarter to 16.7% and average asking rents registered at $21.24, down 2 cents from the previous quarter. The report also shows that 5.3 million square feet of new office space was delivered in the U.S. office market and there was 30.3 million square feet under construction – indicating two more years of limited new supply.

To read the full report, click here. For more news and information visit Blumberg Capital Partners.

CMBS Markets Better Than Anticipated

CoStar released a new article this week titled "CMBS Markets More Hardy Than Doomsters Speculated" observing that, despite analysts bracing for a flood of defaults, the CMBS markets appear to be performing better than anticipated. An excerpt:

Predictions earlier in the year of a CMBS tsunami of defaults flooding the market largely missed their mark. Delinquencies, which were forecast to hit 12% by 2012, now seem likely to top out at right around 10% this year. And issuance last year tripled from 2009's anemic $5 billion to $16.1 billion in 2010, with 40% of the year's issuance occurring in the last quarter of the year - a much faster recovery than many anticipated, according to Christopher T. Moyer, an associate with Cushman & Wakefield Sonnenblick-Goldman LLC.

"Three major factors contributing to the stabilization of the CMBS delinquency rate," David Tobin, principal of Mission Capital Advisors in New York, told CoStar. "New originations have helped reduce overall delinquency. Conduit programs have re-started or started anew because of the pending maturity avalanche that is expected, because secondary market performance of CMBS has been strong following the credit implosion, and because firms perceive CMBS to have less credit and regulatory risk than RMBS [residential mortgage-backed securities]."

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NAR Says CRE Market Stabilizing, Vacancies Peaking

According to the National Association of Realtors® the commercial real estate markets are flattening out and appear to be stabilizing. The association expects modestly improving fundamentals in the coming year. "Property fundamentals are improving, investment capital is slowly flowing back into the sector, commercial mortgage originations are increasing, and demand for CMBS issuance is gaining traction," Standard & Poor's said in a Bloomberg report. An excerpt from NAR's office market findings:

Vacancy rates in the office sector, where a large volume of sublease space remains on the market, are forecast to decline from 16.7 percent in the current quarter to 16.4 percent in the fourth quarter of 2011, but with very little change during in the first half of the year.

The markets with the lowest office vacancy rates currently are New York City and Honolulu, with vacancies around 9 percent. All other monitored markets have double-digit vacancy rates.

Annual office rent is expected to decline 1.8 percent this year, and then slip another 1.6 percent in 2011. In 57 markets tracked, net absorption of office space, which includes the leasing of new space coming on the market as well as space in existing properties, should be a negative 3.7 million square feet this year and then a positive 16.4 million in 2011.

For more news and information visit Blumberg Capital Partners.

NAR Expects Steady Improvement in Commercial Market

The National Association of Realtors (NAR) held their 2010 Conference & Expo in New Orleans this month, coined "NARdiGras 2010: A Fountain of Inspiration" with 125 education sessions and insights from business leaders. NAR's Chief Economist Lawrence Yun and Hugh Kelly, clinical professor of real estate at New York University Schack Institute of Real Estate, shared their predictions surrounding the commercial market and indicated a slight improvement in commercial lending.

"Banks' profits have returned to healthy levels. As a result, it is inevitable they will return to the business they were created for, which is lending," said Yun. "Commercial real estate has experienced a sharp price correction, but there is still a shortage of buyers because of lack of adequate capital resources." Yun said with imports and exports in the U.S. rising, the demand for industrial space will improve. His commercial forecast shows steady improvement in the market with rents stabilizing and net absorption slowly improving. Yun also predicts a moderate GDP expansion of 2 percent to 2.5 percent in the next two years and an unemployment rate of eight percent in 2012 and six percent in 2015.

Kelly pointed out that most commercial mortgages have been random and idiosyncratic, stressing that the lending environment should not remain that way. "The banks are in the driver's seat, meaning they can cherry-pick deals and there is no stigma to turning away business," said Kelly. "The capital flow in the commercial real estate market has been very selective. To achieve full recovery, lending practices must improve."

For more news and information visit Blumberg Capital Partners.

US Commercial Prices Fell 3.3% in August

The latest report from Moody's Investors Services has been released showing that commercial prices in the U.S. dropped 3.3% from July to August of this year, a continued decline in the market that's seen prices down some 45.31% since the peak set in October 2007. Moody's commercial real estate prices are now 19% lower than the consumer price index but analysts expect the index to "revert to a long term trend line close to that of the CPI".

"The commercial real estate market in the US has become trifurcated with prices rising for performing trophy assets located in major markets, falling sharply for distressed assets, and remaining essentially flat for smaller healthy properties," said Nick Levidy, Moody's managing director in a Property Wire article. The Moody's/REAL CPPI report is produced by the MIT/CRE and is a complimentary report to their alternative transaction based index (TBI) as it is published monthly and is formulated from a completely different dataset supplied by Real Capital Analytics, Inc. and Real Estate Analytics LLC.

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