Economy
Commercial Real Estate Sectors Steadily Improve
Feb 25th
WASHINGTON (February 25, 2013) – Major commercial real estate sectors continue to improve, albeit slowly, with gradual economic improvement and job creation driving absorption of space, according to the National Association of RealtorsÒ quarterly commercial real estate forecast.
Lawrence Yun, NAR chief economist, said rental housing demand has been exceptionally strong. “Rent increases have been higher in multifamily housing where supply is not matching strong demand, thereby allowing landlords to raise rents at faster rates,” he said. “Overall commercial real estate leasing activity continued to grow in most markets during the closing months of 2012, which is modestly lowering vacancy rates in all of the commercial sectors early this year.”
National vacancy rates over the coming year are expected to decline 0.4 percentage point in the office market, 0.4 point in industrial, 0.3 point for retail and 0.1 point in multifamily, with that sector experiencing the tightest availability.
“Business spending is expected to rise faster in 2013 because of record high corporate profits. Low interest rates also are permitting companies to improve their balance sheets,” Yun said.
NAR’s latest Commercial Real Estate Outlook1 offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc.,2 a source of commercial real estate performance information.
Office Markets
Vacancy rates in the office sector are forecast to fall from a projected 16.0 percent in the first quarter to 15.6 percent in the first quarter of 2014.
The markets with the lowest office vacancy rates presently (in the first quarter) are Washington, D.C., with a vacancy rate of 9.4 percent; New York City, at 9.6 percent; and Little Rock, Ark., 12.1 percent.
Office rents should increase 2.6 percent in 2013 and 2.8 percent next year, following a 2.0 percent gain in 2012. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, is expected to total 34.0 million square feet this year and 42.3 million in 2014.
Industrial Markets
Industrial vacancy rates are likely to decline from 9.6 percent in the first quarter of this year to 9.2 percent in the first quarter of 2014.
The areas with the lowest industrial vacancy rates currently are Los Angeles and Orange County, Calif., each with a vacancy rate of 3.6 percent; Miami, 5.6 percent; and Seattle at 6.0 percent.
Annual industrial rents are projected to rise 2.3 percent this year and 2.6 percent in 2014, after increasing 1.7 percent last year. Net absorption of industrial space nationally is likely to total 121.8 million square feet in 2013 and 103.5 million next year.
Retail Markets
Retail vacancy rates are forecast to slide from 10.7 percent in the first quarter of the year to 10.4 percent in the first quarter of 2014.
Presently, markets with the lowest retail vacancy rates include San Francisco, 3.5 percent; Fairfield County, Conn., at 4.2 percent; and Orange County, Calif., 5.2 percent.
Average retail rents will probably rise 1.5 percent in 2013 and 2.1 percent next year, following a 0.8 percent gain in 2012. Net absorption of retail space is seen at 11.9 million square feet in 2013 and 16.4 million next year.
Multifamily Markets
The apartment rental market – multifamily housing – should see vacancy rates ease from 4.0 percent in the first quarter to 3.9 percent in the first quarter of 2014; vacancy rates below 5 percent generally are considered a landlord’s market with demand justifying higher rents.
Areas with the lowest multifamily vacancy rates currently are New Haven, Conn., at 2.0 percent; New York City, 2.1 percent; and Minneapolis and Syracuse, N.Y., each at 2.5 percent.
Average apartment rents are expected to increase 4.6 percent this year and 4.7 percent in 2014, after rising 4.1 percent in 2012. Multifamily net absorption is projected at 270,600 units in 2013 and 253,200 next year.
The Commercial Real Estate Outlook is published by the NAR Research Division. NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR.
The NAR commercial community includes commercial members; commercial real estate boards; commercial committees, subcommittees and forums; and the NAR commercial affiliate organizations – CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.
Approximately 78,000 NAR and institute affiliate members specialize in commercial brokerage and related services, and an additional 232,000 members offer commercial real estate services as a secondary business.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries. For additional commentary and consumer information, visit www.houselogic.com and http://retradio.com.
1Additional analyses will be posted under Economists’ Outlook in the Research blog section of Realtor.org in coming days at: http://economistsoutlook.blogs.realtor.org/.
2Beginning in the third quarter of 2011, NAR commercial forecasts have been generated based on historical data provided by REIS, Inc., and do not correspond with prior historical information from previous forecasts. This source permits coverage of more metro areas than were previously covered.
The next commercial real estate forecast and quarterly market report will be released on May 28 at 10:00 a.m. EDT.
Information about NAR is available at www.realtor.org. This and other news releases are posted in the “News, Blogs and Videos” tab on the website. Other commercial information and reports are posted in the Commercial Research area of the “Research and Statistics” tab.
Commercial Real Estate Recovering at a Slower Pace
Aug 28th
Reported August 27th, 2012 by the National Association of Realtors.
Positive underlying fundamentals continue to support all of the major commercial real estate sectors, but a slowdown in job creation and ongoing tight loan availability has tempered growth in some areas, according to the National Association of Realtors® quarterly commercial real estate forecast.
Lawrence Yun, NAR chief economist, said there are mixed results among the commercial sectors. “Job creation in the second quarter was about half of what we saw in the first quarter, which is moderating demand in the office sector,” he said. “Industrial and warehouse space is holding on better because imports and exports have advanced. While exports to Europe generally are down, trade has been robust with India, China and other Asian nations, along with Brazil, Mexico and our strongest trading partner – Canada.”
Although still positive, dampened demand is slightly moderating rent growth with the exception of the multifamily market. “Sharply higher demand for apartments is causing rents to rise at faster rates,” Yun said. “A return to normal household formation will mean even lower vacancy rates and higher rents in the future.”
The current commercial real estate cycle has been driven by shifts in demand without an oversupply of new construction. “The difficulty small businesses have in getting commercial real estate loans for leasing or purchase is keeping a lid on demand,” Yun explained. “Multifamily is the only commercial sector with a notable growth in new space, with some lending provided through government loans.”
With the exception of multifamily, vacancy rates remain above historic averages seen since 1999. Over that time frame the typical vacancy rate has been 14.4 percent for the office market, 10.1 percent in industrial, 8.1 percent for retail and 5.8 percent in multifamily.
Vacancy rates are marginally declining and rents are modestly rising in all of the sectors, but significant changes in the outlook are unlikely before the end of the year. Many corporate decisions on spending and job hiring are on hold given uncertainty over the upcoming elections, whether Congress will effectively avoid a “fiscal cliff,” and unsettled issues such as health care and banking/financial regulations.
“Overall companies hold plentiful cash reserves, but they are hesitant to hire without clarity over how these outstanding issues will impact the bottom line,” Yun said.
“Commercial real estate gains could be thwarted if lending from small and community banks dry up from excessive regulatory compliance costs, and if international big-bank capital rules are applied to smaller lending institutions,” Yun added.
NAR’s latest Commercial Real Estate Outlook1 offers projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc.,2 a source of commercial real estate performance information.
Office Markets
Vacancy rates in the office sector are expected to fall from an estimated 16.1 percent in the third quarter to 15.6 percent in the third quarter of 2013.
The markets with the lowest office vacancy rates presently are Washington, D.C., with a vacancy rate of 9.4 percent; New York City, at 10.0 percent; and New Orleans, 12.8 percent.
Office rent is projected to increase 2.0 percent this year and 2.6 percent in 2013. Net absorption of office space in the U.S., which includes the leasing of new space coming on the market as well as space in existing properties, should be 24.1 million square feet in 2012 and 47.8 million next year.
Industrial Markets
Industrial vacancy rates are forecast to decline from 10.7 percent in the third quarter of this year to 10.5 percent in the third quarter of 2013.
The areas with the lowest industrial vacancy rates currently are Orange County, Calif., with a vacancy rate of 4.6 percent; Los Angeles, 4.8 percent; and Miami at 6.8 percent.
Annual industrial rent is likely to rise 1.7 percent in 2012 and 2.4 percent next year. Net absorption of industrial space nationally is seen at 59.8 million square feet this year and 67.2 million in 2013.
Retail Markets
Retail vacancy rates are projected to decline from 10.9 percent in the third quarter to 10.7 percent in the third quarter of 2013.
Presently, markets with the lowest retail vacancy rates include San Francisco, 3.8 percent; Fairfield County, Conn., 3.9 percent; and Long Island, N.Y., and Orange County, Calif., both at 5.3 percent.
Average retail rent is forecast to rise 0.8 percent this year and 1.3 percent in 2013. Net absorption of retail space should be 10.3 million square feet this year and 20.1 million in 2013.
Multifamily Markets
The apartment rental market – multifamily housing – is expected to see vacancy rates drop from 4.3 percent in the third quarter to 4.2 percent in the third quarter of 2013; vacancy rates below 5 percent generally are considered a landlord’s market with demand justifying higher rents.
Areas with the lowest multifamily vacancy rates currently are Portland, Ore., at 2.0 percent; New York City and Minneapolis, both at 2.2 percent; and New Haven, Conn., and San Jose, Calif., both at 2.4 percent.
Average apartment rent is likely to increase 4.1 percent in 2012 and another 4.4 percent next year. Multifamily net absorption should be 219,300 units this year and 236,600 in 2013.
The Commercial Real Estate Outlook is published by the NAR Research Division for the commercial community. NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR.
The NAR commercial components include commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and the NAR commercial affiliate organizations – CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.
Approximately 78,000 NAR and institute affiliate members specialize in commercial brokerage and related services, and an additional 232,000 members offer commercial real estate services as a secondary business.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.
NAI Wisinski’s Retail Team Recaps ICSC Event
Aug 2nd
Dick Jasinski (left) and Tim Platt (right) by the NAI Wisinski booth at the ICSC Michigan Idea Exchange
During NAI Wisinski’s bi-weekly retail meeting on Tuesday, a few of the retail associates reported on the ICSC Michigan Idea Exchange which took place in Dearborn, MI last week. Doug Taatjes and Rod Alderink both felt a positive vibe buzzing around the conference. There was a feeling that optimism is high and the attendance, up 20% this year, backed that sense.
Rod went to the conference specifically to get a feel for how shopping centers would fare in the near future, particularly Class B & C centers. He reported that these types of centers, described as neighborhood centers built at least fifteen years ago, still have a tough road ahead. He didn’t see as much interest in these from retailers.
Part of this might be because of all the development going on. Doug noted a large focus on developments that seemed to be 10,000 SF or less. These smaller retail developments, Doug explained, all have one thing in common: food. There are a lot of entrepreneurs out there right now taking big risks to become franchisees of familiar chains. Just this week, he leased space in Goodwill’s new retail center at 2700 Kraft Ave SE to a first time franchisee of Biggby Coffee.
The next ICSC event is in Chicago in October. Stay tuned as NAI Wisinski will be reporting from that event as well.
National Association of Realtors: Lending Standards Hindering Commercial Real Estate Recovery
May 4th
WASHINGTON (May 3, 2012) – Although commercial real estate markets showed signs of recovery in 2011, commercial lending standards have tightened in the past year for small businesses and scuttled a major portion of contracted transactions for smaller properties, according to the National Association of Realtors® annual Commercial Real Estate 2012 Lending Survey.
Lawrence Yun, NAR chief economist, said there is a significant split in commercial lending depending on value. “This is very much a tale of two markets. There have been notable improvements in capital for large commercial transactions valued at $2.5 million or higher, but there remain significant challenges for small business,” he said.
“Our Realtor® members typically are involved in helping commercial clients with purchases under $2 million, where a lack of capital has caused two out of three respondents to report deals have fallen through. Given that most jobs are created through small business, the lack of capital is hurting small businesses and the overall economic recovery.”
According to Real Capital Analytics, more than 13,000 major properties valued at $2.5 million or higher traded hands in 2011. Sales volume increased 51 percent over 2010 to $205.8 billion, with the lion’s share of lending funds coming from big banks. Other funding sources include insurance companies and institutional investors.
By contrast, the NAR survey shows that small business transactions rely heavily on smaller regional and local banks, and small private investors, for lending capital.
Respondents indicate nearly 30 percent of smaller commercial properties are purchased with cash, reflecting the tight credit environment, and some are seller financed. “When credit is tight, cash is king,” Yun added.
The most common types of property transactions referenced in the survey were multifamily, land, warehouse, suburban office and retail strip centers. Other property types include industrial flex space, central business district office, freestanding retail, and restaurants.
Realtors® report the system is clogged with property that must be sold or refinanced, which is significantly impacting the recovery. Long-time investors who never had a problem getting a loan in the past are now being declined.
Commercial Real Estate Lending Survey
More than half of respondents say lending is just as stringent as a year ago, while 23 percent say it is more stringent; 20 percent say it is less stringent but not near historical averages. Members also complained about banks being over-regulated, and refinancing being denied due to stringent internal lender underwriting requirements or low appraisal valuations.
Thirty-six percent of Realtors® said clients used the Small Business Administration commercial refinance program, but of those who didn’t, 45 percent said it was due to burdensome application and reporting requirements.
The Commercial Real Estate 2012 Lending Survey is published by the NAR Research Division for the commercial community. In April 2012, a random sample of 32,459 Realtors® with an interest in commercial real estate was invited to complete an online survey. A total of 474 responses were received, for an overall response rate of 1.46 percent.
NAR’s Commercial Division, formed in 1990, provides targeted products and services to meet the needs of the commercial market and constituency within NAR. The NAR commercial components include commercial members; commercial committees, subcommittees and forums; commercial real estate boards and structures; and the NAR commercial affiliate organizations – CCIM Institute, Institute of Real Estate Management, Realtors® Land Institute, Society of Industrial and Office Realtors®, and Counselors of Real Estate.
Approximately 78,000 NAR and institute affiliate members specialize in commercial brokerage and related services, and an additional 232,000 members offer commercial real estate services as a secondary business.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing 1 million members involved in all aspects of the residential and commercial real estate industries.
The commercial real estate forecast and quarterly market report will be released on May 24 at 10 a.m. EDT.
CARWM: First Quarter Sold Report
Apr 17th
FIRST QUARTER SOLD REPORT RELEASED
Commercial real estate in West Michigan is continuing to show increased activity and growth, according to recently released first quarter closed sales statistics reported to the Commercial Alliance of REALTORS®.
The number of commercial sale transactions reported for the first quarter of 2012 has increased 23.8% compared to the first quarter of 2011. Retail and office transactions reveal a large increase in activity, with increases of 45.8% and 40% compared to 2011. The industrial sector, which showed huge growth in 2011, reported two fewer transactions in the first quarter of 2012, than in 2011.
Overall commercial real estate sales volume correlates directly with the slow down in the industrial sector. While office sales soared with a 109% increase over 2011, and retail showed steady growth at 7.2%, sales volume for industrial properties declined by 63.9%.
The slow down in the industrial sector is not necessarily indicative of a lack of demand for industrial property. “The industrial sector is experiencing something that hasn’t been seen for several years – the need for new construction of manufacturing and warehouse space. The current inventory of larger footprint industrial space is extremely limited, ” stated 2012 CAR President Mary Anne Wisinski-Rosely, of NAI Wisinski West Michigan. “The office and retail sectors increases in both the number of transactions and volume demonstrates the strength and viability of doing business in West Michigan.”
COMPARATIVE ACTIVITY REPORT – CLOSED SALES |
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| First Quarter 2011/ First Quarter 2012 | |||||
| NOTE: This report reflects closed sales reported to Commercial Alliance of REALTORS from the West Michigan area, particularly Kent, Ottawa, Muskegon, Allegan and Kalamazoo Counties. This report does not include leasing activity. |
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| Property Type | Number of Transactions 2011 | Number of Transactions 2012 | % Change | ||
| Industrial | 24 | 22 | -8.3% | ||
| Retail | 24 | 35 | 45.8% | ||
| Office | 15 | 21 | 40.0% | ||
| TOTAL | 63 | 78 | 23.8% | ||
| Property Type | Real Estate Sold 2011 | Real Estate Sold 2012 | % Change | ||
| Industrial | $16,508,901.00 | $5,952,744.00 | -63.9% | ||
| Retail | $7,396,680.00 | $7,930,550.00 | 7.2% | ||
| Office | $3,910,650.00 | $8,172,500.00 | 109.0% | ||
| TOTAL | $27,816,231.00 | $22,055,794.00 | -20.7% | ||
Grand Rapids: Medical Mile serves as a catalyst
Apr 5th
Photo Courtesy of John Eisenschenk
It was a little less than two decades ago that local business leaders could see what was unfolding in West Michigan. The industrial sector was steadily declining, and companies were either going out of business or moving away. It was evident that something had to be done.
That’s when two hometown heroes, Amway founders Richard DeVos and Jay Van Andel, proposed their vision to turn Grand Rapids into one of the top medical services cities in the world. Their leadership and philanthropic efforts spurred a series of events, forever changing the landscape, mentality and image of Grand Rapids.
One of the city’s first streets, Michigan Street, running parallel to I-196, was the initial site of their vision. In 1996, Jay and Betty Van Andel founded the Van Andel Institute. They broke ground in 1998, and the Van Andel Institute opened its doors in 2000. The institute is now home to scientific research that is focused primarily on cancer and Parkinson’s disease and has received more than $1 billion in research funding.
The original development was a $60 million facility. In 2010, the institute opened a second phase with an additional 242,000 square feet at a cost of $175 million.
Butterworth Hospital, now part of Spectrum Health, sits atop the hill on Michigan Street. In 1993, the Helen DeVos Women and Children’s Center moved to the site working as part of Spectrum Health.
In 2011, the Helen DeVos Children’s Hospital opened its doors to a 440,000-square-foot facility at a cost of $286 million, largely funded by the DeVos family. Spectrum Health combined with other local generous donors to found the Meijer Heart Center and the Lemmen-Holton Cancer Pavilion, costing about $137 million and $78 million, respectively.
The Medical Mile is host to Michigan State University’s (MSU) College of Human Medicine, Grand Valley State University’s (GVSU) Cook-DeVos Center for Health Sciences, Grand Rapids Community College’s Calkins Science Center, and Ferris State University’s pharmacy program.
MSU’s building is 180,000 square feet, and GVSU’s is 217,000 square feet, costing $90 million and $57 million respectively. In total, more than $1.2 billion has been invested in the Medical Mile and the surrounding area on world-class medical facilities.
The problem isn’t a lack of interest in the Medical Mile, but rather a lack of space. The corridor has barriers on all sides: the freeway to the north; the Grand River to the west; Heritage Hill, a historic part of Grand Rapids with 1,300 homes dating back as far as 1848 to the east and south; and the rest of downtown to the southwest.
The developers of Midtowne Village, a six-building complex that houses the 100,000-square-foot Women’s Health Center, had to get the zoning of their site changed as well as purchase and demolish 46 homes.
Other organizations are beginning to look for vacated buildings that can be occupied for their use. GVSU plans to cross the expressway to the north and develop another site for medical use, and MSU is in the process of acquiring the old Grand Rapids Press building that remains vacant with the presses still inside.
Continue reading…
NAI’s Stu Kingma Sheds Light on West Michigan Market
Nov 22nd
On Wednesday November 9th, Stu Kingma was given the opportunity to present at the 25th Annual University of Michigan (UM) & Urban Land Institute (ULI) Real Estate Forum. The UM/ULI Real Estate Forum is a non-profit volunteer organization dedicated to enhancing real estate education both professionally and at the university level. For twenty-five years they have been celebrating best practices in Michigan real estate. Professionals in real estate, development, and academia were all present at the forum. This year, the Forum’s focus was on identifying opportunities.
PricewaterhouseCoopers (PwC), along with the ULI published “Emerging Trends in Real Estate 2012” and ranked Detroit dead last among U.S. cities in terms of investment and development among other things. Stu was part of a Local Response Panel and discussed recent opportunities in West Michigan. Stu’s goal, along with the rest of the Forum, was to refute the claims of the PwC report. “Even though the PwC numbers show Detroit is lagging behind the rest of the country, great things are happening here,” Stu says. “I especially wanted to demonstrate that great things are happening in West Michigan as well. We are sustainable and growing in many sectors.”
Some of the topics Stu covered include the manufacturing rebound, the growing medical sector, food manufacturing, and the advanced battery production sector for vehicle use.
Dr. Peter Linneman’s Global Economic Outlook
Oct 21st
Last Week, Dr. Peter Linneman of NAI Global hosted a web conference on the global economic recovery. His presentation covered all aspects of commercial real estate, the general welfare of the economy, and thoughts on what needs to be done to help the recovery. Some key talking points from the presentation are below:
- Low demand for development (Commercial construction at a 50 year low)
- Household formation is up, but still remains low (High unemployment rate for household formers)
- GDP has rebounded, but still worse off (3%) on a per capita basis due to a 3% increase in population
- The economy is adding jobs, but we still have a long way to go (Have only recovered 21% of jobs across the nation)
- Pent-up households are declining
- Vacancy rates are declining slightly across the board (Industrial, Office, Multi-Family)
- Retail sales are back up (Still 3% less due to population increase)
To listen to the web conference in its entirety, click here to register.
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Dr. Linneman, widely recognized as one of the leading strategic thinkers in the real estate industry, was recently cited as one of the 25 most influential people in real estate by Realtor Magazine. He serves as Principal of Linneman Associates.
Forbes: The Grand Rapids-Wyoming Metropolitan Area Most Optimistic For Hiring This Summer
Sep 2nd
Jacquelyn Smith, Forbes Staff
Employers in all 50 states expect the bleak employment picture to perk up during the three-month period ending in September. In fact, hiring managers in dozens of metropolitan areas anticipate considerable increases in hiring, while others present a darker forecast.
The employment services firm ManpowerGroup has surveyed more than 18,000 employers in 100 metropolitan areas to find out who’s hiring, who’s firing and who plans to maintain their current staff levels in the third quarter of 2011, July through September. Of the surveyed employers, 20% anticipate an increase in staffing levels in their second quarter hiring plans, while 8% expect a decrease in payrolls. The difference between those numbers gives you what ManpowerGroup calls a net employment outlook of 12%–or 8% when seasonally adjusted, which is still up from 6% for the same period last year. Sixty-nine percent of employers expect no change in their staffing, and the final 3% of employers are uncertain.
The survey reveals that the metropolitan area with the most optimistic forecast of all for hiring this summer is Grand Rapids-Wyoming, Michigan.
“This is the strongest outlook we’ve seen in the Grand Rapids-Wyoming market in almost three years,” says Melanie Holmes, a vice president at ManpowerGroup. “The market results are considerably more optimistic than last quarter and one year ago. Among our clients, we’ve seen real strength among manufacturing employers as well as a demand for clerical and customer service support.”
The Grand Rapids-Wyoming region enjoys a 24% net employment outlook, the percentage of employers that expect to add employees (30%) minus the percentage that expect to reduce their workforce (6%). Another 61% said they anticipate no change, and 3% didn’t know.
“This does not come as a surprise,” says Kevin Stotts, vice president of community programs at the Grand Rapids Area Chamber of Commerce. “The employers I have spoke with, either large or small, have been very optimistic over the past several months. In fact, a persistent challenge with many employers in the area has been finding qualified talent to meet their needs. While specific sectors may not have rebounded as quickly, most are doing better than 2010, which was a strong year.”
To read the rest of the Forbes article, please click here.
National Association of REALTORS: By the Numbers – The Year Ahead in Commercial Real Estate
Feb 22nd
Sam Chandan PhD, Global Chief Economist of Real Capital Analytics
Against the backdrop of a tentative recovery in the domestic economy, continued inertia in the nation’s employment trends, and an element of dysfunction in the nation’s capital, headline measures of activity in the commercial real estate investment marketplace have improved markedly over the course of 2010. Through November, sales of significant commercial properties had handily surpassed $90 billion dollars, on pace to double by year-end the cyclical low of $54 billion in activity measured in 2009. Looking forward into 2011, improving price discovery amongst buyers and sellers in leading markets, coupled with stabilizing property fundamentals and a significant improvement in the terms of credit, portend further gains in the most visible metrics of market health. Barring ineffective management of the downside risks to the economy’s modest baseline trend, the sector’s equity and debt markets are on much stronger footing than a year ago.
An Uneven Recovery
Notwithstanding very welcome indications of stabilization, the industry’s headline statistics belie a striking and persistent unevenness of the recovery in investment and credit trends. In a flight to quality, investors over the last year have focused their efforts on acquiring assets in the nation’s most visible and most liquid markets. This focus has resulted in a concentration of capital in a small subset of markets, New York City, Washington, DC, and San Francisco foremost amongst them. It is in these markets that competition for assets has been most intense, supported by a diversity of domestic and foreign investors, the former frustrated by the absence of opportunities in distress and the latter less dependent on mortgage financing.
The national increase in transaction volume and positive momentum in pricing are overwhelmingly reflective of outcomes in the few markets where the uncertain national economic outlook has fomented large liquidity premiums. Elsewhere, price discovery remains severely hampered by a paucity of investor demand for properties and continuing and sometimes severe constraints on the availability of credit to finance new transactions or refinance maturing debt. A key question for the new year will be whether economic and labor market conditions improve to a degree that investors will take up investments in smaller markets or if exaggerated spreads will be required to induce capital inflows.
Credit Markets Ease
Underpinning gains in major markets and for the highest quality properties, the availability of credit in support of significant property sales, as well as for the refinancing of maturing debt, has improved sharply in recent quarters. Buoyed by the aforementioned pricing trends and nascent recovery in property fundamentals in major markets and some property sectors, a broader range of lenders – including CMBS conduit originators, foreign banks and life companies – has reengaged with commercial real estate investors in the latter half of the year, albeit on terms that remain conservative by historic standards and even as smaller banks have curtailed their lending. This improvement in mortgage availability has been amongst the necessary conditions for a broader move towards normalization in the sector’s capital markets.
Coinciding with the improving position of many lenders, the dominant role of agency financing in the apartment sector has moderated as other institutions have begun to compete more aggressively for lending opportunities. In major markets, in particular, institutional and securitized lenders’ readiness to provide new acquisition financing on performing assets has supported the shift in investor activity away from the agency and private buyers that dominated activity in 2009 and early 2010, and towards sales of larger core properties in the nation’s leading markets. The improvement has pushed new acquisition financing to 35% of loan originations in 2010, up from 32% in 2009 when the balance weighed further in favor of refinancing activity. This trend will continue into 2011, albeit unevenly.
A Plateau in Distress
An important facilitator of this healthier new acquisition financing environment —additions to distress nationally fell to their lowest levels in two years in the third quarter of 2010, reflecting a slower pace of deterioration in legacy mortgage pools and the positive impact of more stable economic and credit market conditions. The default rate for commercial real estate mortgages held by the nation’s depository institutions—including mortgages at least 90 days delinquent and mortgages in non-accrual status—increased to 4.36 percent in the third quarter of 2010, up from 4.27 at midyear. While the default rate continues to trend higher, the most recent increase is the second smallest in three years.
Including $4.3 billion of new trouble in September, third quarter additions of $13.7 billion were down by 60% from the second quarter and by 61% from the same quarter one year ago. For the first time this cycle, workouts of distress – including resolutions and restructurings of troubled loans – almost fully offset additions over an entire quarter, even though workout activity declined modestly. As a result, the third quarter’s net increase to outstanding distress was just $2.4 billion, the smallest rise since 2007. The pool of lender real estate owned (REO) property increased by $1.2 billion over the same period, measuring its smallest increase since Q2’08. The current trend – if not disrupted by inadvertent policy or economic shocks – suggests that distress may be nearing its inflexion point, with workouts poised to overtake new additions even as larger numbers of CMBS loans reach maturity and face challenges in refinancing.
Risks from the Overhang of Unresolved Distress
Of course, slower inflows to distress and the absence of distress investment opportunities do not mean that deteriorating mortgage performance is not a feature of the market landscape. Rather, distress has been heavily intermediated, left unresolved or residing on bank balance sheets. As of late 2010, there is almost $200 billion in unresolved and unattended distress in US commercial real estate. The question of how we manage to draw down these balances when some of the most aggressively underwritten loans will only reach problematic maturity dates in 2011 and later should be a key source of concern. While a sudden outpouring of distress will inevitably provide opportunities for distress investors, it will do so by undermining the price stability that has been crucial in driving improvements in sales and credit.
Dr. Sam Chandan is Global Chief Economist of Real Capital Analytics and an adjunct professor at the Wharton School of the University of Pennsylvania. Chandan holds a PhD in applied economics from Wharton and was a doctoral scholar at Princeton University. His complete biography is available at www.chandan.com.
