Market forecast Market analysis

Signposts to Recovery

Deciphering the direction of today's market isn't easy.

Inspired by a torrent of current data and events, I coined a new designation for myself. These three letters may serve as a beacon to light the way forward, to cut through the fog of uncertainty, and to lead us up the wall of worry that besets any honest observer of the commercial real estate markets. I declare that I am a CEO: not a corporate officer, but a chief executive optimist.

How does one earn this soon-to-be auspicious title? By reading the signposts. There are several indications that the industry is turning a major corner, allowing us to view what lies just a short distance ahead.

Looking Back

I started my career in the late 1980s. For exactly eight months I believed I was on the fast track to Master of the Universe status. Then the savings and loan crisis took hold and the music stopped.

How could this have happened? “This cycle is different,” the commentators said. They argued that the U.S. business cycle was extended, the market was still undervalued, globalization was the norm, and the Japanese had 100-year investment horizons. A few short years later a new acronym was born: RTC for Resolution Trust Corp.

The unfolding storyline revealed that things were indeed different, but in ways all of us had missed. The crises of the early 1990s led to a massive re-pricing of assets. This single aspect of the last downturn created the foundation for innovations that have transformed how commercial real estate has been owned, financed, and managed ever since. Commercial real estate evolved from a staid, marginally liquid asset class into a broad-based, liquid investment with many ways to play. Real estate investment trusts expanded ownership and attracted a great deal of new capital by offering diversity in product and geography.

The exit of the S&Ls drained a primary source of liquidity from the market, but this imbalance was addressed in part through the innovation of commercial mortgage-backed securities. From a standing start in 1994, CMBS expanded access to capital, topping out at a staggering $230 billion of new debt capital in 2007. The rapid pace of change experienced by other industries was now taking hold in all aspects of commercial real estate.

Thinking Forward

The past two-and-a-half years have been long and difficult for our industry. Today, it is necessary to look beyond the near-daily “parade of horribles” to see the emerging signs of a new cycle. The signs read LTR: liquidity, transactions, and recapitalization. These are the themes to watch carefully.

Liquidity is returning to the market. CMBS began 2011 with a promising start. The credit market volatility — brought on by the debt ceiling/debt downgrade and further propelled by the uncertainty in Europe — has hobbled the CMBS market in recent weeks. As I write this in September we are looking at a busy schedule of nearly $4 billion of new CMBS ready to come to market. These new issues are being watched closely to see whether spreads will move back toward the 200 basis-point range of earlier this year and, very importantly, how deep the market is for new CMBS bonds of every class.

The commercial real estate capital markets are rebuilding in spite of a stormy political and macroeconomic climate. With a nearly 2 percent, 10-year Treasury, the demand for higher yields will increase and commercial real estate will take its proper place as an attractive investment in what the Federal Reserve promises to be a protracted low-yield environment.

Beyond CMBS, banks and life companies continue to be active. Many banks are well past their capital-raising exercises and must seek positive loan growth. George Smith Partners has heard from several of our national and regional bankers over the past month that they have been handed mandates to aggressively seek quality new loans.

Transaction volume is the next trend to watch. We should see a meaningful increase in transaction volume over the next 12 months. The market competition for investment-grade commercial real estate is fierce. Investors are beginning to venture farther from core markets to find yield. Many of our clients are increasing their focus on quality assets in secondary markets that promise higher returns. I expect this trend to continue.

I also expect that we will see more PKD — previously known as distressed — assets come to market. Banks, funds, and special servicers will release more property to the market in the coming months, fueling greater transaction activity.

Another trend that must not be ignored is the enormous wave of commercial real estate debt maturing between 2011 and 2015. Estimates are as high as $2 trillion. Much of this debt was originated at the top of the last cycle between 2005 and 2007. There is a considerable amount of capital on the sidelines waiting to see how it can participate in the value opportunities that will emerge from this massive recapitalization wave. And this trend is only just beginning: It will become a major theme in 2012 and 2013.

Critical elements of the new cycle are taking form. For the cycle to really take hold, we need some calm between political storms and we need to see more economic indicators turn green. When this happens, the cycle will accelerate.

Until then, I invite you to join me on my corner cloud, the one reserved for chief executive optimists. Right now it is a bit lonely, but soon it will be standing room only.

David Rifkind is managing partner of George Smith Partners, a real estate investment banking firm located in Los Angeles. Contact him at

Market Focus

What happens in the Northeast is repeated in many markets.

Like many metro areas across the nation, the New York Tri-State region is a market of haves and have-nots for commercial real estate investment opportunities. From both location and product standpoints, buyers and financing sources remain particular when it comes to their selections.

The multifamily sector, a darling of the investment community, provides an excellent example. Solid market fundamentals and an ongoing consumer shift from home ownership to renting continue to fuel this sector’s strength. A positive emerging trend is stepped-up investor interest in secondary markets, where stabilized assets are generating 6 percent to 8 percent yields, compared with 3 percent to 5 percent yields in traditionally high-demand markets such as the New Jersey Gold Coast and Manhattan.

At the same time, there is very little traction in these secondary markets when it comes to value-add multifamily investments. An 80 percent-leased property with rollover simply is not going to attract a buyer, let alone financing. The bottom line is that if the economy does not improve dramatically, occupancy rates have little chance of improving at properties in secondary and tertiary markets.

Investors remain equally discriminating when it comes to office properties. Here, first-tier markets continue to attract the most attention, and New York City and Jersey City are among the region’s most desirable. Further inland, the Princeton, N.J., submarket is performing well, but many other suburban office markets are struggling.

In general, investors and lenders hesitate to give credit for any value-add deal that is based on the need to either retain or add tenants or grow rents. Rents are not growing, and very little tenant absorption is occurring. Value-add product only moves if it is viewed as absolute distress.

With respect to retail, everyone is in love with grocery-anchored shopping centers, but there are not a lot of properties currently available to meet the demand from investors and buyers. The same could be said for retail properties in general.

There is also a huge demand for industrial. New Jersey, with its port infrastructure, is considered a strong market overall. Indeed, all of the big empty boxes in the New Jersey Turnpike Exit 7A and 8A submarkets have deals pending, albeit at distressed rental rates. By the end of the year or first quarter 2012, there will not be any empty big boxes. This demand and the resulting steady improvement in the industrial market is driven by the development constraints of recent years, making the existing product very attractive.

The most active funding sources, particularly for class B and C properties, are opportunity funds. We are also seeing activity from entrepreneurs — including many that are backed by opportunistic investors.

For now, the New York region is an investment sales arena that continues to be a land of haves and have-nots. But change the name and it could be the story of many U.S. markets.

Andrew Merin is a vice chairman of Cushman & Wakefield and heads the Metropolitan Area Capital Markets Group based in Rutherford, N.J. Contact him at


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