‘Pockets of Opportunity’ Exist for CRE Investors, Analysts Say

MBA (6/12/2008 ) Murray, Michael
Commercial real estate investors—inside and outside the United States—could find pockets of opportunities in commercial real estate despite the continuation of re-pricing risk.

Chicago-based Jones Lang LaSalle’s report, U.S. Investment Market Report—Spring ’08, said it would take the remainder of this year and into early 2009 before “some semblance of ‘normalcy’” returns to the capital markets. However, the within that time, foreign banks and other lending institutions have increased their interest in the U.S. market.

“This is also opening opportunities for U.S. real estate investors that are finding debt too difficult to obtain at home,” the report said. “This is particularly relevant for large transactions of more than $50 million, which have become very difficult to place amid the debt correction as that segment of the market was dominated by CMBS [commercial mortgage-backed securities].”

“There is no denying that 2008 is presenting challenges for commercial real estate investors, particularly office investors. However, it is not all gloom and doom,” said New York City-based Cushman & Wakefield in its report, Short-Term Volatility, Long-Term Stability.

The report said office sector transactions are the lowest in more than nine quarters, and nearly half of the $210 billion in U.S. office sector transactions last year took place in seven major markets, including New York, Washington, D.C., Boston, Chicago, San Francisco, Seattle and Los Angeles.

“Although volume is down, the sector is continuing to attract investment capital and the supply-side fundamentals in the leading U.S. office markets are solid,” C&W’s report said. “Barring a prolonged economic downturn, fundamentals in these markets should remain solid, giving owners/investors the upper hand once again when the economy rebounds.”

Jones Lang LaSalle forecasts the bid-ask gap between sellers and buyers—sellers refuse to accept current pricing and buyers are unable or unwilling to pay pre-debt market correction prices—start to narrow by the end of the year.

“This will slowly begin to change, however, by late 2008 and into 2009 as more transactions will yield greater information about the new pricing of risk, and sellers [an increasing portion of which will be highly motivated sellers with maturing debt], will have an increasing determination to dispose of assets,” the report said.

“We have just seen a tremendous spike in offerings pulled from the market,” said Dan Fasulo, managing principal at Real Capital Analytics, New York. “That’s the U.S. and Europe to an extent as well.”

While performance of other asset classes will continue to have some impact on demand for real estate investment, Jones Lang LaSalle analysts said a weak U.S. dollar and high commodities would favor commercial real estate.

“If, as many believe, the global economy is entering a sustained period of a historically weak U.S. dollar coupled with very high commodity prices, it stands to reason that commercial real estate investment would enjoy solid performance, as owners have historically benefited during previous inflationary environments,” the report said.

Fasulo said a number of equity funds and real estate investment trusts inside and outside of the U.S. are “sitting on a war chest of capital right now” and will eventually have to put the money in play—particularly REITs that will need to pass their income to their shareholders.

“It’s really a game of chicken right now between the buyers and sellers,” Fasulo said. “If everything else remains the same, someone is going to have to blink in the fall—and I think it’s going to wind up being the buyers.”