-notes from Real Capital Analytics’ May 2010 Month in Review
1. Markets are picking up momentum in terms of transaction activity. In May, there was $5.1 billion dollars in sales for all property types. This is up 55% since last year.
2. The strongest gains are in the apartment and office sectors, but there is a pronounced divide between top office properties, like those in New York and Washington DC, and everything else. Weak prices continue in secondary and tertiary markets.
3. Pricing for distressed assets continues to decline: The average price-per-square foot for distressed property sales is $109, for non-distressed it’s $185 per-square-foot. This trend parallels office occupancy rates which are below 60% for distressed properties and over 80% for non-distressed properties.
4. In any given month, a quarter to one-third of apartment and hotel sales are related to distress. This is why these are the property types with the shortest term lease structure, which will benefit and recover the quickest with any economic rebound.
5. There is demand in commercial real estate across the full spectrum of investors. Banks reclaiming assets, REITs, private REITs, and foreign investors are all adding to their portfolios right now. There’s capital coming from the institutional pension fund sector and private equity funds are sitting on a large amount of capital.
6. While it’s problematic to some market participants that banks and other lenders remain the most active in terms of additions to their portfolios in 2010, over a period of time as the financial system begins to stabilize, the market can begin to absorb a larger number of these assets. While banks are acquiring now, the ultimately don’t have the flexibility to retain those assets over an extended period of time.
7. People need to be patient, because what investors are really looking for is some clear sense of where the overall economy is headed. There are certainly reasons to be optimistic about the momentum built in the last several months. Although a number of jobs have been lost over the last couple years, five consecutive months of private sector payroll increases makes this recovery more consistent than the recovery in the 2002-03 recession.
8. Caution is required when looking at bidding, acquisition prices, and cap rates for some of the office and apartment trades over the last couple months. There is the expectation that improvement in the labor market and economy will continue. Some of those improvements haven’t taken place yet, and a reversal or slow down in the current economic trajectory could ultimately impact pricing.
9. Some of the programs and changes in IRS regulations are playing out in the market the way regulators and policy makers hoped for. A significant share of new distress is related to a transfer of assets to special servicing where the loans are still current, but where potentially in a year from now there may be trouble refinancing the debt when the last extension option expires. Attacking the problem early is exactly what these programs were designed to do.
10. The new buyer landscape is diverse. The largest groups are private REITS, newly minted REITs, and foreign firms. In 2006-2007, the height of the market, thousands of one-shot investors bought into the upswing. A thousand buyers each put out acquisitions of $100 million or more during 06-07; only 125 of those have been active in any meaningful way over the past 18 months.
11. There’s a lot of money that wants to be in real estate, but with the limited options, it’s tough to get into. It is unclear at this point where the money will go, but development is being mentioned as a viable alternative as construction costs are down in the U.S.
12. Ultimately, the risk/reward opportunity in real estate investments still remains very attractive compared to other options.