Commerical Real Estate Hitting Bottom
Thursday, November 05, 2009
Attention Commercial Investors! If you are interested in taking advantage of the incredible commercial investment opportunity that is becoming available in todays economic climate, please contact me at 317 846-4888 or email derek@guttinggroup.com. We are certified distressed propert experts (CDPE) and are currently building a database of investors while we 'hunt down' distressed commercial properties. When we find the next opportunity, we will be sure to pass the deal along to you!
Recent surveys have shown that the Commercial market is at the bottom or near the bottom. Read the complete article from Co Star.
Derek Gutting, The Gutting Group of Keller Williams Realty, www.GuttingGroup.com
Emerging Trends: "The Bottom is Near!" Predict CRE Forecasters
November 4, 2009
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However, forecasters see the prospect for near-term opportunity once the markets bottom out, bringing a long-expected deluge of loan workouts, write downs, defaults and foreclosures -- along with the time-tested rush by patient, cash-rich investors, who, with some fortunate timing, will be able to tap some very attractive buying opportunities at bottom-of-the-cycle prices.
Also, leasing activity is expected to increase as tenants seek to take advantage of sharply lowered rents, resulting in more potential commissions for brokers, but also likely resulting in more pressure on highly leveraged building owners.
At least five major surveys and forecasts have been released since late last week by such influential industry groups as Real Estate Roundtable, the MIT Center for Real Estate, the National Multi Housing Council and NAIOP. PricewaterhouseCoopers and the Urban Land Institute released one of the industry's most widely watched surveys, the annual Emerging Trends in Real Estate, on Thursday morning.
The surveys tend to confirm the 2010 projections made last month by CoStar and its newly acquired analytics and forecasting advisory firm, Property Portfolio and Research Inc. (PPR), which were among the first forecasts to be released. The office vacancy rate stood at 13% at the end of the third quarter, and CoStar forecasts several more quarters of negative absorption and another 300-basis-point increase in the vacancy rate to 16% as the office market trails what's shaping up to be a "jobless recovery." Strong demand for office space is not expected to return until 2011-12, but when it does recovery should be robust, with the national office vacancy rate expected to fall to 10.5% by 2014 if job numbers begin to pick up as expected, according to CoStar and PPR projections.
Looking ahead, CoStar forecasts that the national industrial vacancy rate will rise from 10.2% in the third quarter to as high at 11% next year, but the amount of negative net absorption -- which approached nearly 150 million square feet year to date through the end of the third quarter -- should taper off over the next couple of quarters. The industrial market will slowly resume leasing activity starting in mid-2010, generating reasonably strong positive quarterly absorption through 2013. Rents, however, likely will remain moribund for two or three more years.
Coming off an idle 2009, the next year will likely rank as the slowest year of the modern era for new development, according to projections covering US market conditions presented by CoStar in a series of webinars last month.
Editor's Note: Get weekly news and updates by e-mail on new development projects, land sales, significant ground-breakings, deliveries, and trends around the U.S. affecting development and construction. Join the distribution list for CoStar's In The Pipelinecolumn and newsletter.
Read this week's edition.
A record 900 people participated in this year's Emerging Trends in Real Estate 2010 survey by PricewaterhouseCoopers and ULI. The results won't do much to either comfort the pessimists or encourage the optimists.
Across the board, investor sentiment was at or near record lows. Survey respondents predicted that vacancies will rise and rents will fall in all property types before the market hits bottom next year. Only apartments rated as a "fair" prospect, with all others sinking into the fair to poor range, with respondents especially bearish on retail and hotels. Development prospects ranged from "dead" and "abysmal" to "modestly poor."
"Not surprisingly, the overwhelming sentiment of Emerging Trends interviewees remains decidedly negative, colored by impending doom and distress over prospects for an extended period of anemic demand and costly deleveraging," the report said.
On the other hand, value declines of 40% to 50% off 2007 peaks will present once-in-a-generation opportunities, respondents said. "A sense of nervous euphoria is growing among liquid investors who can make all-cash purchases” from distressed sellers and banks, said ULI Senior Resident Fellow for Real Estate Finance Stephen Blank.
Debt markets will begin to recover, but loans will be conservative, expensive, and extended only to a lender's best customers. REITs and private equity funds will get into the action, providing loans to battered borrowers at a steep price.
The survey finds near-record lows in investment sentiment in every property type. Only apartments registered fair prospects with all other categories sinking into the fair to poor range. Hotel and retail record the most precipitous falls. Development prospects are “largely dead” and drop to new depths and practically to “abysmal” levels for office, retail and hotels. Warehouse and apartments scored only marginally better at “modestly poor.”
Markets to Watch
Washington D.C. was the hands-down favorite market among respondents, with normally tight-fisted insurers and banks providing financing for new deals. Bethesda, home to the National Institutes of Health, should benefit from increased biomedical spending and inside-the-Beltway Virginia markets are expected to suffer only modest erosion relative to past downturns.
San Francisco. Despite volatile prices, occupancies and rents, the Bay City's expanding tech industry fed by nearby Silicon Valley ranks the city as one of the top buys for apartments, warehouse, office and hotels.
Austin. Investors expect the Texas capital's low state taxes and a pro-business environment to fuel future growth and corporate relocations.
Boston. The city's universities, life science and high-tech companies make Beantown a long-term favorite, with a tight downtown apartment and condo market.
New York. The recovery pace depends on the hammered banking industry, and Midtown availability rates are expected to skyrocket from mid single digits into the mid-teens as office rents fall 40% or more.
Rounding out the top 10 markets to watch are Houston, Seattle, Raleigh/Durham, Denver and San Jose - all of which are strong in some combination of green technology, high-tech and life science.
One of the main questions appears to be what constitutes a market bottom and when will we get there, particularly with regard to CRE prices and values? Most of the forecasts call the pricing bottom for next year, and sooner rather than later, but the MIT Center for Real Estate suggests that transaction pricing for institutional real estate at least may have already bottomed in the third quarter.
Editor's Note: Wall Street is now worrying about the deals completed in 2005 and earlier. If the concerns are correct, tens of billions of more dollars in commercial mortgage-backed securities (CMBS) may be at risk of credit downgrades. For the full version of this story, including a CoStar Analytics survey of current cap rates versus 2004, click here.
Here are some other highlights (or lowlights depending on your perspective) from this week's forecasts and surveys:
- Commercial property markets remain extremely stressed with high unemployment pushing up vacancies, no credit capacity and values still plummeting with little prospect for significant near-term improvement, according to Real Estate Roundtable's latest quarterly survey of the sentiments of senior commercial real estate executives.
- Despite shrinking rents and values, some developers, owners and investors are optimistic that 2010 will bring slight growth in national productivity and improved liquidity in credit markets, according to NAIOP's annual Vital Signs survey, with 44% of respondents predicting that borrowing will improve somewhat in the coming year.
- For the first time in more than a year, transaction prices in commercial property deals sold by institutional investors rose in the third quarter, suggesting that the U.S. market may have found a bottom, according to the aforementioned MIT Center for Real Estate in Cambridge, MA. The center’s transactions-based index (TBI) rose 4.4% in the third quarter from the second quarter, the largest jump since before the start of the mid-2007 market downturn.
NAIOP: Confidence Will Improve - Slightly
Respondents to the NAIOP Vital Signs report, a survey of nearly 400 developers, owners and investors conducted in early September, said an increase in consumer and business confidence will likely bring higher household and corporate spending throughout 2010. Lenders, chiefly banks, private investors and insurers, will loosen their purse strings a bit in 2010.
For 2009, 64% of NAIOP respondents felt that borrowing money was the same or somewhat easier than a year ago. But confidence improves a bit for 2010, with 80% of this year’s participants indicating that loans will remain difficult or become somewhat more available. Almost 32% of respondents feel that industrial rents will improve in 2010 as availability rates start to level off. But they noted that new industrial development remains slow in 2009 and will be almost non-existent in 2010.
"Obviously the volatile markets of the last year have created great concern for those seeking capital, and the decline in development is the consequence," said Douglas Howe, chairman of NAIOP and president of Touchstone Corp. in Seattle. "While the overall consensus of this survey is somber, there’s hope that most indicators will at least stabilize in 2010."
Almost all NAIOP respondents saw office rents deteriorate in 2009, and most expect rents to level off next year, with a few markets expecting a slight increase. Vacancy rates are expected to continue to increase in 2010 -- especially in markets heavily impacted by the residential meltdown -- and begin leveling off by the end of the year. Virtually no one in the NAIOP survey had a positive take on office or industrial development -- a far cry from the boom years when development interest was in the mid 40% range.
RE Roundtable: 'Grim Reality Sets In'
The three indices tracked by the Real Estate Roundtable Sentiment Survey have risen considerably since the near-collapse of financial markets last fall -- a reflection of respondents' collective sense of relief at having survived the worst of the turmoil. However, the latest numbers, based on a survey of more than 100 respondents, remain well below the ideal of 100, with the "current conditions" index standing at 56. An index of 100 means all survey respondents have answered that conditions today are "much better" than they were a year ago and will be "much better" 12 months from now.
"The problems now are more clearly defined and there's a grim sense of reality setting in, but that's a long way from saying markets are stabilizing or that conditions are on the mend," said Roundtable President and CEO Jeffrey DeBoer. "
Though the percentage declined to 77% from 93% in the previous quarter, a large majority of respondents still noted that property values are down versus a year ago. And they aren't optimistic about the future, with 71% saying they expect values to remain "about the same" or to erode even further in the next 12 months.
Although capital market conditions remain "extremely fragile," the survey shows some somewhat improved outlooks for 2010. On the debt side, 28% of those polled said credit availability is worse today than a year ago, compared with 71% who said so in the previous quarter.
Echoing the Federal Reserve's latest Beige Book report last week, DeBoer cautioned that any signs of improvement or a leveling off in the rates of decline should be looked at in the context of where things stood 12 months ago.
MIT: Prices May Have Bottomed
The new report by the MIT Center for Real Estate notes that not only did the transaction price index (TPI) show gains, but transaction volume grew markedly for the second straight quarter in a row. Together, the report yields the first increase in market sentiment in two years. Prices that buyers are willing to pay, MIT's so-called demand index, posted a 12% increase after eight consecutive quarters of decline.
"One quarter does not a trend make, and we are still well below normal trading volume," acknowledged MIT center research director David Geltner in a press release. "Nevertheless, this is the strongest sign of a bottom that we’ve had in two years."
For its indices, MIT uses transactional data from the National Council of Real Estate Investment Fiduciaries (NCREIF), a trade group representing institutional real estate investment companies.
