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
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
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.
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
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 email@example.com.
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
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
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
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 firstname.lastname@example.org.