Dare I say it ... could the commercial real estate (CRE) market be turning or at least stabilizing? I think it's fair to say that the punditry has been incredibly negative about the state of CRE over the past year, but commercial real estate service providers Jones Lang Lasalle's
In the Americas, JLL reported that transaction volumes are up 54%, and Europe and Asia are posting solid numbers as well. CB reported that it's seeing a strong increase in transactions and leasing, especially in the U.S.
On the leasing side of the business, this was the first in 10 quarters in the U.S. office market where we saw a negative net absorption rate (that's a net decrease of square footage on the market). While the decrease was only a miniscule 3.2 million square feet, it indicates that the rental market is at least reaching equilibrium, a solid indication for rents. JLL says it's seeing large companies taking advantage of low rents to consolidate space, upgrade their digs, or lock in long-term rents. Additionally, there's an expectation that when rents do stabilize, and eventually tick back up, there will be a lot of tenants that were sitting on the fence who will be clamoring to lock in reduced rents.
JLL is seeing institutions and local buyers picking up "core" properties, and in many cases paying relatively low-cap rates (i.e., they're generating low returns). These "core" deals are usually fully leased buildings in prime locations, which of course makes it a little easier to get loans. I'm assuming some of these institutional buyers are pension funds chasing yield in what they assume are "safe" assets.
There are also opportunistic deals taking place, such as the agreement JLL recently announced with General Growth Properties
Additionally, it seems that troubled bank assets are still slow to come to market. This is probably the result of the "lend and extend" or "delay and pray" strategy that many banks have been using to avoid foreclosure.
What's kind of crazy is that this strategy of kicking the can down the road a couple of years might actually be working -- at least in the short term. Still, many regional banks are still in trouble, and more than 100 have already gone bust this year, but there seems to be enough interest from institutional money to prop up prices in key markets.
Research firms Moody's
However, CoStar's proprietary Commercial Repeat-Sale Indices are indicating a slowing down of investor activity. The company believes this slowdown is likely caused by a weakening economy and housing sector, as well as financial reforms that have slowed the commercial mortgage markets as banks sort out the regulations.
It's been surprising to see REIT indexes outperforming most asset classes year-to-date, but I think we're starting to understand what's been going on. Fund managers raised a lot of money in the wake of the credit meltdown hoping to pick up a flood of distressed properties on the cheap. If these managers can't put the money to work, they'll need to return it to investors. As a result, these institutional investors are chasing deals and pushing up prices.
By multiple accounts, market fundamentals are improving and the consultants, like JLL and CB, have had the luxury of capturing fees on multiple sides of the transaction. In the short term, brokers like JLL and CB who make their living off commissions should benefit from a market that may have found a bottom.
