NAI Global Issues 2011 Global Market Report; 25^th Annual Volume Provides Review/Forecast for 217 Commercial Property Markets Worldwide

The commercial real estate industry struggled through the start of 2010, but by year’s end there were signs that conditions worldwide had stabilized and were beginning to improve, according to the 25^th annual Global Market Report released today by NAI Global.

After a prolonged, challenging period marked by frozen credit, sidelined investors, stalled development, rising vacancy rates and declining rental rates and property values almost anywhere you turned,  improvement, albeit modest, is expected in just about every market sector and geography in 2011.

Much of the activity in 2010 was driven by corporate space users taking advantage of a tenants’ market worldwide to lock in low effective rental rates and reduce their overall occupancy costs. Office rental rates in some markets have fallen more than 30% from their mid-2007 peak. This activity is expected to increase as economic growth returns, further unleashing significant pent-up demand.

“Although 2010 was another very challenging year for the industry, we began to see clear signs that the global economy and commercial real estate markets had stabilized and were beginning to improve with a noticeable pickup in transaction volume around the world,” said Jeffrey M. Finn, President & CEO of NAI Global. “Companies around the globe are taking advantage of the current market, extending or renegotiating leases, securing investment properties, disposing of underperforming assets and finalizing plans for growth in the next 24 months. We expect a much more active market for buyers, sellers and occupiers as conditions continue to improve.”

The investment market also showed signs of life in 2010 as credit markets thawed. The massive wave of foreclosures that was predicted heading into 2010 never materialized as financial institutions opted to extend or re-work troubled loans. However, the sidelines are growing crowded with REITs, private equity and institutional investors who have amassed a tremendous amount of capital and are actively looking for deals, said Finn. Commercial real estate investment should also get a boost from new investors drawn to real estate in pursuit of yields and further enticed by record low interest rates.

Markets across the U.S. are showing signs of recovery, as are parts of Asia, Europe and Latin America. But financial collapses in countries like Greece, Iceland and Ireland are endemic to the rocky global recovery. For every Brazil and China, countries that are showing signs of strong growth, there are contrary markets like Spain that are showing signs of a prolonged recession.

“The real estate market’s near-term future is all about the strength and timing of the economic recovery,” added Dr. Peter Linneman, NAI Global Chief Economist and Principal at Linneman Associates. “Job growth will be key, as a recovery without jobs does not fill much space. As jobs are created, nearly 2 million new households will form and consumer confidence will rebound, leading to a rebound in corporate profits and economic stability. The momentum building at the end of 2010 points to a hopeful outlook for 2011.”

NAI Global is the premier managed network of commercial real estate firms and one of the largest real estate services providers worldwide.  Headquartered in Princeton, New Jersey, NAI Global manages a network of 5,000 professionals and 350 offices in 55 countries.  Now in its 25^th year, NAI’s Global Market Report offers insider insight and perspective on market conditions reported by NAI experts on the ground in over 200 property markets worldwide. To obtain a copy of the full report, contact psetaro@naiglobal.com.

Select U.S. Markets Highlights

Class A Office space in the CBD, especially hard hit during the recession, saw leasing activity increase in 2010 as space users took advantage of a tenants’ market to lock in low rates or upgrade from lower-quality space. While not yet a cause for celebration, it was enough to shave a half-point off the national average vacancy rate for downtown Class A office space, which declined from 13.8% in 2009 to 13.3% in 2010 after rising almost 35% the previous year. The national average rental rate for Class A space in the CBD slipped 14.1% from $37.11 in 2009 to $32.51 in 2010, after falling more than 24% the previous year.

The nation’s retail markets also appear to have stabilized. While some markets still struggle to fill big boxes vacated by national chains, others have seen new entries and local retailers upgrading to better locations. The national average vacancy rate for downtown/CBD retail space stood at 8.2% in 2010, down from 8.9% in 2009, while rents slipped from $39.90 in 2009 to $39.79 in 2010.

Industrial markets appear to be on the mend. While demand for weak warehousing space continues to be weighed down by weak consumer demand, the market has benefitted from a diminishing pipeline of new construction. Vacancy rates for bulk warehouse space stood at 10.7% in 2010, down from 10.9% in 2009. Rental rates slipped from $4.60 in 2009 to $4.55 in 2010.

Atlanta: The office market has begun to gradually rebound. Leasing activity has increased, but this activity is dominated by consolidation and downsizing, so the activity does not translate to lower vacancy. There has been a noticeable increase in the total industrial leasing and sales activity and a decrease in the amount of negative net absorption over the last several years. The retail market will continue to adjust itself with some vacant centers that were ill-conceived. Vacancy rates are high in many areas and rent adjustments downward continue to press landlords.

Boston: Downward velocity in the office market appears to be slowing. Vacancy rates increased to 14.1% and Class A rents decreased to $32/SF. The industrial market has been slowed by the recession, but has not seen a dramatic rise in vacancy. The retail market did not experience much change in market conditions from 2009 to 2010.

Chicago: The office vacancy rate, on the rise for two years, leveled off at 17% in the second half of 2010. New construction and redevelopment projects will remain sidelined until some of the more than 22 million SF of vacant space begins to be steadily absorbed and demand returns. Industrial vacancy rates peaked at 12% but improved in the second half of the year.

Dallas-Fort Worth: Office supply exceeds current demand, making it a tenants market with a vacancy rate of 20%. There is a marked increase in absorption and occupancy rates should increase significantly in 2011. Dallas industrial vacancy stands at 12.5%, as tenants maintain the upper hand. Speculative industrial starts could be seen by the end of 2011. The Fort Worth retail market can expect to see stabilized vacancy by the first quarter of 2011.

Los Angeles: Vacancy rates for new office space remain above 30%. Rental rates are still declining for Class A and Class B space.  Industrial vacancy rates have fallen to 8.6% and rental rates continue to soften across the board. Malls and community centers experienced a small increase in rents, and discount retailers and quick-serve restaurants are the most active in the market. Outlet malls also experienced strong tenant interest; these centers maintain very low vacancy rates and strong rental rates.

Miami: The CBD and several submarkets are experiencing 20% vacancy rates in office space, as most large tenants have relocated or renegotiated favorable terms in premier buildings. The industrial market is improving with large blocks absorbed, including a 342,000 SF transaction. Retail demand is rebounding as consumer spending increases. Despite store closings, supply is in balance because of barriers to entry.

Washington, DC: The nation’s capital is its strongest office commercial real estate market. It continues its track to recovery propelled by federal government activity in 2010. New York-based restaurant operators saw opportunity in the market and targeted high-traffic venues around Verizon Center in Chinatown.

Select Global Market Highlights

Asia-Pacific Region: Asia is leading the global economic recovery. Asia rebounded swiftly in 2009 and into 2010. Asian region real GDP is expected to grow 7.9% in 2010, driven by better than expected exports and strong private demand. 2011 GDP growth is projected to be 7.3%. Expect continued strong growth in the industrialized markets in East Asia, including Hong Kong, Taiwan and South Korea. Improved investment, healthy consumer spending, robust exports and industrial production will propel growth. Despite measures to cool the China property market and slow credit growth, China grew at 11.1% in the first half of 2010 and is expected to grow at 10% for the year.

Canada: The Canadian economy, led by exports and a strong commodity cycle, performed well through 2010. GDP growth is expected to hit 2.3% in 2011, tempered by a modest recovery in the U.S. The economy has gained back all the jobs lost over 2008 and 2009, but unemployment remains high at 8%. Modest employment growth is forecast for 2011. Land prices firmed in 2010. Cap rates and interest rates declined slightly. And transaction volume will remain slow due to the low supply of good quality product.

Europe: Europe mounted a modest recovery in 2010, with European GDP growth within the Euro zone improving from -0.4% in 2009 to 1.7% in 2010. However, growth is uneven across the region and is projected to be only 1.1% in 2011. The more export-oriented economies such as Poland, Germany, France, The Netherlands and Sweden are expected to recover ahead of the remainder of Europe. Meanwhile, Portugal, Italy, Ireland, Greece and Spain, the primary concern in early 2010, appear to be in a prolonged recession. European real estate markets will remain challenging in 2011, though continuing low interest rates may balance out some of the adverse market pressures. The fiscal squeeze will reduce inflationary pressure, allowing central banks to slowly raise interest rates.

Latin America & the Caribbean: The Latin America region witnessed remarkable growth in 2010, driven by strong domestic demand, healthy exports of raw materials to Asia (particularly China), and increasing demand due to the modest recovery in the U.S. The region also benefitted from an increase in domestic investment after years of off-shore investment. Latin America is expected to continue its strong growth in 2011, and the Caribbean is expected to begin its recovery as tourism rebounds due to improved economic conditions around the globe.

With over $1 trillion worth of commercial real estate loans expected to mature between now and 2013, lenders appear to be placing significant importance on restructuring existing loans, as opposed to making new loans. “Delay and Pray” practices delay foreclosures by altering the terms of payments, and/or extending the time a borrower has to pay down a loan. Federal Deposit Insurance Corporation Chair Sheila Bair said in an Oct. 13 speech that these policies are useful in helping the commercial real estate sector recover by offering opportunities to restructure.

At a recent American Bankers Association conference that I attended, there was much chatter about the adverse effects that the Dodd-Frank bill will have on the cost of credit. Hank Paulson, the former Treasury secretary, opined in The Wall Street Journal that  higher capital and liquidity requirements will give us more stable long-term growth. He rejected the notion that these requirements will slow economic growth. In the short term however, with many smaller banks concerned about the adequacy of their capital reserves, commercial real estate lending seems to have decreased in priority at many institutions.

According to the November 29^th edition of the Mortgage Employment Index from MortgageDaily.com, the headcount in real estate finance employment dropped by nearly 1,000 in the third quarter 2010. In October 2005, mortgage employment peaked at 535,400 based on government data. In September 2010, the industry-wide headcount had decreased to 246,400, according to the index.

As we move past 2010, it appears that the industry can expect more conservative underwriting standards in 2011. As banks rewrite existing mortgages, the burden of deriving reasonable market value estimations on distressed properties will fall on the shoulders of the real estate appraisal industry. With many markets experiencing large vacancy rates, volatility in rental rates and terms, and fewer sales, creativity and a solid knowledge of appraisal fundamentals are essential in estimating the market value of unstable properties in unstable markets. In deriving value estimates utilizing discounted cash flow methods, there are numerous projections that need to be made, and the reasonableness of each projection is key to obtaining a reasonable value estimate. Such projections require substantial research and thus an investment of time. In deriving market values utilizing direct capitalization techniques, there are fewer projections required; however each projection takes on paramount importance.

Many predict that commercial real estate values have bottomed out, and that they will remain at these levels until employment picks up and occupancy rates increase. With economic distress spreading in Europe, US states teetering on bankruptcy, and an uncertain political landscape, any projection on where commercial real estate values are headed is clearly subjective.

-Jonathan Fischer, MAI

Jonathan Fischer, MAI, is a Managing Director in NAI Global’s New York City office and works with investors and financial institutions as a member of NAI’s Special Asset Solutions group.

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GROHE believes 160 Fifth Avenue to be an ideal location from which to showcase its products and from which to expand its New York and U.S. operations. The space will predominantly house an interactive showroom and training facility. 

Fred Tuck, Head of Project Management for NAI Global, has been retained to provide Owner Representation Services for GROHE as the 160 Fifth Avenue space is designed and constructed.

GROHE is the largest faucet manufacturer in Europe, and ranks among the top three faucet manufacturers in the world. Truly international in scope, GROHE distributes in over 130 countries. GROHE entered the U.S. market in 1975 and today is recognized as one of the leading faucet brands used in custom homes and upscale remodeling projects.

NAI Global New York City is located in Manhattan at 415 Madison Avenue.

In early November, the FOMC announced their plans for QE2, which calls for the repurchase of an additional $600 billion of long-term treasuries and another nearly $300 billion in MBS over an eight-month period ending June 2011.  Opinions are divided in commercial real estate circles as to whether these actions will be beneficial or deleterious for the commercial real estate industry over the next decade. 

Nearly everybody agrees that one of the likely results from this move is that interest rates are likely to continue their gradual decline in the near term, just as they did following the QE1 announcement.  Since July, the 10-year and 30-year treasury rates have dropped almost 25 bps based on the rumored announcement of QE2.

The decline in interest rates in the near term should help property owners refinance, bolstering their property returns at a time when rents are continuing to ratchet down with every lease expiration due to weakness in office and retail fundamentals. 

But will the QE2 exercise ultimately lead to inflation or, even worse, deflation in real estate values?  The goal with QE1 and QE2 is to increase inflation slightly.  The CPI increase over the past 12 months was a disinflationary 1.1%, and well below the Fed’s target rate of 2%.  Several of or overseas trading partners, like Germany and China, have been vocal in their opposition to this FOMC strategy. 

Another benefit to slight inflation is that it will help asset values recover, which will be good for performing as well as “underwater” properties and mortgages.  It may ultimately help lenders sell their problem loans at close to par, taking more properties out of the “Pretend and Extend” quagmire which makes it difficult for players at all ends of the investment spectrum to reconcile where real values are today.  Some fear that the hidden goal of inflation is that it hides some of the recent problems, and makes it easier for Washington to avoid making any tough decisions in the near term regarding the budget deficit. 

Ultimately, printing money for stimulus programs alone will not put the economy back on its feet.  There needs to be job growth and increased consumer confidence in order to fill vacant office space and make the cash registers ring loud again.  Without jobs and consumer spending, there is a very real risk of deflation beginning in a year or two. 

The actions have certainly spurred increased investment activity by foreign entities in US properties.  That is to be expected, as the US dollar has declined against most major currencies, and is now at a 15-year low against the Yen.  In the third quarter of this year foreign buyers accounted for almost 14% of major US investment sales in the US, compared to the historical average of 8%.   Most of this investment has been in core assets in gateway cities, but it is believed that there may be a domino effect of future increased activity in the secondary markets, as domestic investors seeking better than 5-cap initial yields are forced to run at higher-yielding opportunities. 

The flip side of the relatively low dollar is that our exports are now much more attractive to overseas consumers.  That should have a positive impact on industrial real estate, including port-related properties and warehouse space in general. 

Bottom line:  the QE1 and QE2 Fed strategy may provide the needed band—aid of lower interest rates, which helps many property income statements look better, but the key fundamental requirement of job growth will be needed to create a long-term improvement in property values.

-Mark De Riemer

Mark T. De Riemer is Senior Managing Director of Investment Services at NAI Global New York City, and is a member of the Investment Services Group.

As hirings start to accelerate more space will now be needed for new employees.  This environment is a breath of fresh air for brokers who have the optimism and energy to develop new business and create new opportunities for the coming year.

Because of the weak economy over the past three years there has been a change in the way employers do business and more of a focus on an economy of space.  Gone are the days of large private offices.  They have now been replaced by smaller offices and executives can meet with their guests in one of the several conference rooms that are set up for everyone’s use.  Reception rooms are also smaller and economy of size is the watch word.  With this in mind, companies will think about relocating to new space in order to recreate their company’s operation consistent with the new standards of efficiency and cost savings.

-Gil Robinov 

Gil Robinov is an Executive Managing Director at NAI Global New York City. New York is home to more than 185 member governments of the United Nations. Robinov is recognized as the industry leader in this marketplace and has represented over 25% of these organizations.

Despite a roaring start to the new millennium, the U.S. economy has little to show for the past 10 years. NAI Global Chief Economist Dr. Peter Linneman examines the key factors and trends that led the U.S. and global economy on a volatile roller coaster over the past decade, from a promising start to a punishing conclusion in a new white paper.

“In 2000, our federal budget surplus was over $200 billion and the world was at relative peace. In 2010, the federal budget deficit is in excess of $1.3 trillion and the U.S. is engaging in two major military operations around the globe,” said Dr. Linneman. “During the past 10 years, we have seen the country has weathered two recessions, two wars and we witnessed the horrors of the September 11^th attacks. We experienced oil prices of nearly $150 per barrel, a booming and plunging housing market, a booming stock market and an extreme financial crisis.” Dr. Linneman examines where we have been and what we can learn from this last decade.

Dr. Linneman provides analysis of real GDP growth (and contraction), household wealth, unemployment, industrial production, federal spending and looks into the true causes of the financial crisis. He also provides insight into what will happen with the economy in the coming decade.

A Disastrous Decade, NAI Global’s white paper, is a scorecard for the 10 years from mid-2000 through mid-2010, reviewing how the economy has changed over the first decade of the 21^st century.

This latest white paper follows A Robust Rebound to Mediocrity?, Dr. Linneman’s view of the economic recovery’s impact on the jobs market today and tomorrow. NAI Global’s white papers and research resources are available for free download at www.naiglobal.com under Publications/Articles & White Papers.

Dr. Linneman is also Professor of Real Estate, Finance and Public Policy at the Wharton School of Business, University of Pennsylvania, and Principal, Linneman Associates.

NAI Global today announced it has doubled the size of its New York City operations and is expanding its lease at 415 Madison Avenue to accommodate its growing Manhattan base. Upon completion of the buildout, NAI Global New York City will occupy 14,000 square feet, taking over the entire 7^th floor.

Despite a weak economy, NAI Global has successfully carried out an aggressive plan to bolster both its local brokerage and global services in New York since acquiring its former Manhattan affiliate, NAI DG Hart, in late 2006. NAI New York City now has approximately 30 professionals in the New York City office, a veteran brokerage staff that includes some of the most experienced leasing and sales professionals in Manhattan commercial real estate. The growing New York offices also serve as the worldwide base for NAI’s Corporate Solutions and related global services

“We are excited about the progress we have made in this highly competitive market. We have grown our operation by more than 100% over the past year,” stated Jeffrey M. Finn, NAI Global President & CEO. “We are continuing to add breadth and depth to our brokerage, capital markets and corporate solutions teams to help our clients take advantage of the numerous opportunities emerging as the local and global market recovers. With the expansion we are able to accommodate new talent as we seek double the size of our operation yet again.”

NAI Global New York City Executive Managing Director Andrew Simon negotiated the lease renewal and expansion with landlord Rudin Management. NAI Global is temporarily occupying additional office space on another floor at 415 Madison Avenue until the renovation is completed.

For more information, please visit www.nainyc.com.

Zuckerman joins NAI Global New York City after nearly 30 years of brokerage with Helmsley-Spear. At NAI, Zuckerman will focus on office, multifamily and hotel brokerage.

Zuckerman managed 1,700 residential apartments and commercial properties for the late Harry Helmsley and Irving Schneider prior to launching his sales career. His first sale of five properties in Lower Manhattan was to the late William Gottlieb. Some of his subsequent sales include the Scott Hotel, Roger Williams Hotel (Leasehold), Blackstone Hotel, Ruxton Hotel, Parc Lincoln Hotel, La Rochelle apartment building, and Commander Hotel, all in New York City.

Zuckerman is a graduate of Upsala College. He is a licensed real estate broker and a member of the Real Estate Board of New York.

NAI Global’s New York City office is located at 415 Madison Avenue.

Most of the investors that have put money into those funds are institutional investors, large funds of funds, and are now under pressure from their investors to pay the money back. Because most of the money is in real estate assets and there is not that much liquidity left in the funds to repay the investors, management has decided to close the funds, collecting fresh money from new investors or selling some buildings to meet the request from investors who want to get out.

Now, because the expectation by the management is that many more investors will call their money back, caused by the loss of confidence in the performance of those funds, they have taken the decision to close the funds.

DEGI Europe has a current value of €1.3 billion and P2 Value about €852 million (coming from €1.7 billion in September 2005).

They now have a three year period to sell the properties to avoid the need to sell for dumping prices. Every six months they will look at how much money they can pay back.

This provides some interesting opportunities and probably will be the start of many more products coming to the market place.

Demand for quality products exists, and it may be that the proceeds reached might be better than expected.

The German economy in general is recovering surprisingly well. In spring 2010 the growth of the gross national product was at 2.2%. This growth rate was surprisingly high and broke the mold by far. Primarily responsible for the growth were Germany’s export and building investments. Consumption and equipment investment gave strong impulses for increased economic activity as well.

The unemployment rate has started to fall slowly but constantly due to the fact that companies are engaging more people again. Only the inflation rate which was close to zero in fall 2009 increased and is currently at 1%.

The future prognoses stay optimistic. Experts expect a stable economic growth of about 2% for the upcoming year 2011.

Until the end of the third quarter in 2010, there were 1.34 billion SM rented in Germany’s top office market centres. Vacancy slightly increased since the last year. While the average vacancy rate of the German office market centres was 8.9% in 2009, it lies at almost 10% in the third quarter of 2010. Because of the increased willingness of the companies to recruit personnel and invest, the markets for office space and industrial sites are reacting positively over the next 8-12 months.

-Andreas Krone

Andreas Krone is the CEO of NAI apollo, NAI Global’s exclusive Member firm for the Frankfurt, Berlin, Dusseldorf, Cologne, Stuttgart and Muelheim an der Ruhr markets in Germany.