By Doug Sword

Copyright © 2010 HeraldTribune.com

The pair of reports suggest that, for institutional quality property at least, property values have found a bottom and cap rates have peaked and could even start to subside. Neither of the reports is projecting a worry-free environment, however, in fact both are projecting a long, long road to full recovery.

“While most investors sense that the worst is over in terms of market deterioration, supply greatly outweighs demand across all property sectors keeping overall vacancy rates high and rental rates on a downward trend,” said Susan Smith, director, real estate advisory practice, PricewaterhouseCoopers. “Top-tier locations are showing the most signs of life with respect to tenant interest and recovery potential. However, inspiring leasing trends have yet to fully materialize, further contributing to this sense of market flux.”

Commercial real estate investors seem frustrated and disappointed at the lack of quality buying opportunities that many expected would have materialized by now, according to the second quarter 2010 findings of PricewaterhouseCoopers’ (PwC) Korpacz Real Estate Investor Survey. The report notes that the unknown speed and strength of the economic recovery has many investors anxious, with the uncertainty surrounding the large debt volume coming due in 2011 and 2012 amplifying their angst.

In the quarterly survey, the average overall capitalization rate, a key measure of investors’ expectations of property income and value, declined in 17 of the survey’s 30 markets over the past three months, an indication that investors perceive less risk in the industry now, particularly for prime properties and better markets, according to the PwC survey.

The ‘bottoming’ of the industry continues to be recognized by investors’ expectations that overall cap rates will either decline or hold steady in most markets over the next six months. Specifically, survey participants forecast overall cap rates to hold steady in 18 of the survey’s 30 markets. Furthermore, the survey data revealed that 13 markets could see overall cap rates decline by as much as 100 basis points in this time period.

Surveyed investors cited potential declines in near-term overall cap rates in the Manhattan office market, the national warehouse market and the national apartment market (all three segments down as much as 100 basis points).

For individual office markets included in the survey, average overall cap rates remain lower for central business district (CBD) submarkets than for suburban counterparts, suggesting that investors continue to see less risk and better investment potential in the major CBDs.

“There is a tremendous amount of capital targeting institutional-grade, quality assets,” Smith said. “In fact, survey participants cited that strong competition among well-capitalized buyers is helping to elevate sale prices and lower overall cap rates for many prime properties. Furthermore, the low percentage of distressed trades as of late reflects investors’ preferences as most buyers are steering clear of ‘junk’ and focusing only on core assets according to survey participants.”

John Murray, commercial real estate portfolio manager and head the PIMCO’s CRE/CMBS team, also reported that capital is clearly returning to commercial real estate, helping to stem the value declines in the sector. But, his report stressed that optimism should be tempered because national price indices are misleading when transactions are limited and fail to reflect the significant uncertainty around property valuations.

“Capital has returned to CRE and high levels of bidding activity in certain sectors have made many observers and participants optimistic,” Murray wrote in his report. “Transactions have generally been limited and capital flows have been concentrated in trophy properties and in properties where below-market agency financing is available. This has provided a false sense of clarity on the real level of property values. A significant volume of weaker and distressed assets has yet to be liquidated and this foreshadows further pressure on values. Against this backdrop, we caution against the presumptions that a rapid broad-based recovery is underway.”

Murray is not as optimistic on the direction of cap rates as PwC survey participants.

“We expect that the spread between cap rates and 10-year Treasuries will remain above its average of 265 basis points seen since 1995, as the litigious deleveraging process leads to a sustained period of risk aversion in the sector,” Murray wrote. “If cap rate spreads remain above their average, the market can expect long-term cap rates near or above 8%. In this case, even if properties with floating rate debt can successfully avoid defaults in the short term, rising longer term rates will create a floor for cap rates and limit recoveries.”

As the deleveraging cycle unfolds, attractive opportunities are likely to be available to investors with capital, Murray wrote. Although, he warned that capital flows alone should not be a gauge of where attractive investment opportunities lie.

“Many owners in primary markets are perplexed by the extent of non-US capital flowing into their markets. With this in mind, new investors should not expect a continued rapid appreciation in pricing for trophy assets in these markets,” Murray wrote. “Conversely, owners of grocery-anchored retail assets in smaller markets express frustration in securing financing today, despite strong tenant profiles and positive demographics. As capital returns to CRE, we expect this yield spread (as reflected by cap rates) between trophy assets and less liquid, quality assets in smaller markets to eventually tighten.”

Florida’s double-digit unemployment is expected to creep higher again as part-time U.S. Census jobs dry up. Realtors and retailers alike anticipate a pull-back in spending from the first half of the year. And then there’s the daily havoc on tourism, fishing and other industries wrought by the still-uncontrolled massive oil leak in the gulf.

But where are we exactly in terms of the economy?

Is it an extremely tepid and jerky recovery? A double-dip recession? Or, as economist Paul Krugman warned, possibly the early stages of the country’s third big depression, following the Long Depression of the 1870s and Great Depression of the 1930s?

A trio of economists who closely track Florida took the less draconian view. They formed somewhat of a consensus that growth has slowed much more than expected, but the feared double dip — or worse — is still unlikely.

Here’s how they see the rest of the year unfolding.

MARK VITNER

Senior economist, Wells Fargo

We believe the recession ended in Florida shortly after it did nationwide, which we deem was around the middle of last year. Nonfarm employment has risen during three of the past four months, producing a net gain of 78,000 jobs since bottoming in January. While part of the recent improvement is due to hiring for the decennial Census, hiring has picked up across a broad assortment of industries, including hard-hit sectors such as manufacturing and construction.

We’ve been expecting a second-half slowdown. We figured by July and August, everyone would be screaming about how the economy has already fallen into another double dip.

I think this is slower growth; I don’t see a double dip. Too much of the downside risk has already been taken out. The financial system is able to raise capital again. Inventories are relatively lean.

I think by the end of this year, we’ll see a legitimate recovery in housing take hold. We’re seeing a modest improvement in employment.

What we’re experiencing is withdrawal pains. It’s like when you’ve quit smoking or quit drinking or any other addiction and are trying to go cold turkey. That’s what this economy is trying to do — quit its addiction to stimulus. It’s not a simple process, and it’s not something that tends to go smoothly.

I am concerned that we’re winding down the stimulus so suddenly. Look at aid to the states. That should gradually be reduced over three years.

Florida’s numbers are lagging behind the nation’s. As of May we were seeing some significant improvement in job growth but June and July numbers will come down. We’ve got a lot of people in Florida about to lose (unemployment) benefits and that’s going to slow consumer spending.

In Florida, people will be concerned that the little bit of progress we made is being reversed. But because a good percentage of the job growth here was in Census hiring, it’ll exaggerate the extent of the slowdown.

(Hiring) is still minuscule in may ways, but it’s no different than what we’ve seen at the start of every recovery we’ve ever seen in Florida. It’s like springtime in Chicago; it’s still pretty cold. We’re not going to replace the jobs we lost in this recession until the middle of the decade, if we’re lucky.

SCOTT BROWN

Chief economist, Raymond James & Associates in St. Petersburg

The last two or three months we’ve seen expectations for growth coming down, but it’s still positive.

It doesn’t look to me like a double dip is likely, but it’s certainly in the realm of possibility.

The risks seem to be more tilted to the downside. You still have a lot of residential and commercial real estate problems. You have state and local budgets under strain so you’re seeing job cuts and some increases in taxes. You’ve got the fiscal stimulus that’s going to be ramping down. You’ve got the Bush tax cuts expiring at the end of this year. Europe’s (austerity) moves with their budgets have slowed the global recovery down somewhat.

But … we’re much, much better off than we were a year ago in terms of the direction. We were losing 750,000 private sector jobs in the first quarter of last year. Now we’re starting to see some job gains, even in Florida.

We thought all along this recovery really wasn’t going to be rapid, and if it’s slowing down a little more than anticipated, that means the recovery is going to take a lot longer.

The two biggest fears are a policy mistake where taxes are raised too soon … or the Fed starts to raise interest rates too soon. I don’t think the Fed is going to make that mistake.

One of the biggest problems is you’re not seeing much growth in small businesses. It’s not just the (tighter) credit. A lot of these small firms don’t want to borrow; their outlook is not too promising.

We also have the gulf oil spill taking a toll on consumer confidence. Negative psychology could be feeding on that at least for the near term.

The psychology is really hard to gauge. If enough people expect a double dip, it could be self-fulfilling. Consumer spending could go down. I don’t think it would be quite as severe as the first leg down, but it’s possible.

SEAN SNAITH

Director, Institute for Economic Competitiveness at the University of Central Florida

I’m still where I was in the middle of last summer … (when) I coined that this is a gravy-boat (shaped) case of recovery. This is not going to be a robust and V-shaped recovery.

What we’re seeing is a deceleration back to that path. We got some eye-popping GDP (growth) numbers in the fourth quarter and it was a bit deceiving. It was really driven by inventories rather than a sustainable recovery.

I’m not ready to raise the double-dip flag at this point. It’s just a deceleration into this more gradual recovery path. The labor market, while it’s not improving dramatically, is no longer worsening. That … itself can boost the economy. (Consider) those folks who have remained employed but were still worried about their future employment. As that threat of job loss goes away, some of that pent-up demand to spend comes out. That combined with fiscal and monetary stimulus will keep things going forward, but at this very slow pace.

It will continue to take a long time for the housing market to recover, the stock market is going sideways at this time and the labor markets will be painfully slow to recover.

Historically, after a recession as deep as this one, there would be a pretty strong bounceback. But because of those factors … that is dampening that recovery. All of this is like a wet blanket on recovery.

I think what we’re seeing is a more pronounced version of the jobless recovery (that) we saw in the wake of the 2001 recession. More pronounced and more protracted. The problem this time is not so much the slow climb, but the slow climb out of a much deeper hole.

For the first time since the industry began forming commercial mortgage-backed securities (CMBS), delinquencies reached above 6%, according to a report from Trepp, which studies commercial real estate trends.

For the month of December, 6.07% of CMBS loans fell behind by 30 days or more, up from 5.65% in November and a far climb from 1.21% in December 2008. That’s a 500% increase in one year, according to the report.

Trepp analysts aren’t the only ones noting the surging delinquencies in CMBS. Data from the credit-rating agency Realpoint showed the delinquent unpaid balance rose more than 16% in November to $37.93bn. According to the report, the climb was “an astounding” 440% from a year earlier.

In a recent speech at the Economic Forecast Forum in Raleigh, North Carolina this week, Elizabeth Duke, a governor of the board of the Federal Reserve System provided some reasons for the sharp decline in performance.

“Hit hard by the loss of businesses and employment, a good deal of retail, office, and industrial space is standing vacant. In addition, many businesses have cut expenses by renegotiating existing leases,” Duke said.

She added that reduced cash flows and investors requiring higher rates of returns lead to lower valuations and losses after sales.

“As a result, credit conditions in this market are particularly strained. Commercial mortgage delinquency rates have soared,” Duke said.

According to the Fed’s survey of senior loan officers, banks continue to tighten standards on commercial loans and are reluctant to refinance maturing construction and land development loans.

“In this environment, a turnaround in CRE is likely to lag the improvement in overall economic activity,” Duke said. “However, compared with the situation in the early 1990s, the problems in this sector now appear to be due largely to poor business fundamentals rather than widespread overbuilding, suggesting that the performance of the CRE sector will gradually begin to improve as the economy continues to strengthen.”

According to Trepp, the total CMBS market in the US in 2009 stood at $724.5bn. And, though it is difficult to pinpoint exactly when the first complete CMBS was formed, back in 1999 Morgan Stanley lead the market with $10.5m in issuance.

by Jon Prior.

If you thought the multifamily industry bottomed out in 2009, hold on to your hats. The murky depths of the Great Recession are still to come. It could be another few quarters before the multifamily industry reaches the bottom of the current cycle, according to several recent reports.

More overleveraged developers and owners, surviving on loan extensions, will be forced to turn in the keys in 2010 as fundamentals continue to fall before the market hits bottom around the end of the year. Once there, value declines will approach about 40 percent, on average, from the mid-2007 peak—the worst decline since the Great Depression and worse than seen in the early 1990s. Those are just some of the sobering conclusions reached by The Emerging Trends in Real Estate report, recently released by the Urban Land Institute and PricewaterhouseCoopers.

While there have been much fewer “fire sales,” than in the RTC days, “the quickness at which fundamentals have declined, and the pace at which values have deteriorated, is the difference between now and then,” says Susan Smith, director of real estate……Read more HERE

The quarterly Knight Frank Global House Price Index shows property values increasing in almost half of 32 countries surveyed during the second quarter of this year. “Significantly, quarterly price falls accelerated in only 22 percent of the locations and did not exceed 10 percent in any country,” says Liam Bailey, head of residential research for Knight Frank. “This compares with double-digit falls in a number of locations during the first quarter.”

Some of the strongest signs of recovery are coming from the Nordic countries, with prices up over the previous quarter by 5.3 percent in Norway, 3.9 percent in Finland, and 3.6 percent in Sweden. But countries as diverse as Australia, Israel, and the Netherlands also are posting solid gains.

In some places, demand is being spurred by historically low borrowing costs and homebuyer tax incentives. Sweden’s central bank, for example, has slashed the prime interest rate from 3.75 percent a year ago to only 0.25 percent today, so banks there are now offering home loans at interest rates as low as 1.5 percent.

Interest rate reductions by the Bank of England, coupled with a relatively tight supply of housing in Britain, has reignited the market there as well, sending prices up 1.1 percent in the second quarter after five consecutive quarters of price drops.

Housing market is still fragile

The market is even starting to rebound in the U.S., where the subprime mortgage crisis originally began. U.S. home prices rose 1.3 percent in the second quarter, following declines of 7 percent in each of the previous two quarters. Even hard-hit regions such as California are starting to recover.

But worries still linger. Credit remains constrained as the global economy struggles to recover, and many countries still have an excess supply of unsold property, putting downward pressure on prices. Despite the positive signs in the second quarter, prices in most countries remain lower than a year ago, and Knight Frank says the market is still fragile.

What’s more, super-low interest rates won’t last forever. “One could even say that house prices are now artificially boosted by low mortgage rates,” says Magnus Lange, a partner in the Stockholm office of real estate brokerage Cushman & Wakefield. “I’m expecting to see [Swedish] house prices fall by 15 percent in the year ahead, once banks raise their interest rates.”

And some countries are still basket cases. Bulgaria, where the real estate market once boomed on sales of vacation homes to wealthy Russians and Europeans, saw second-quarter prices fall 9.7 percent, on top of a 12.4 percent decline during the first quarter.

Copyright © 2009 by The McGraw-Hill Companies Inc., Leona Liu. All rights reserved.

That consensus comes from leading forecasters in a survey by the National Association for Business Economics released Monday.

“The survey found that the vast majority of business economists believe that the recession has ended but that the economic recovery is likely to be more moderate than those typically experienced following steep declines,” said NABE President-elect Lynn Reaser, chief economist at Point Loma Nazarene University.

The forecasters upgraded the economic outlook for the next several quarters, but cautioned that unemployment rates and the federal deficit are expected to remain high through next year. Forecasters now expect the U.S. economy, as measured by gross domestic product, to advance at a 2.9 percent pace in the second half of the year, after falling for four straight quarters for the first time on records dating to 1947. They expect a 3 percent gain in 2010.

Still, the federal deficit has ballooned and the jobless rate is expected to lag behind, as employers remain cautious.

The unemployment rate rose to 9.8 percent in September from 9.7 percent, the Labor Department said earlier this month, the highest point in 26 years.

Forecasters expect the unemployment rate to continue to rise, to 10 percent in the first quarter of next year, before edging down to 9.5 percent by the end of 2010.

The recession, the worst since the 1930s, has eliminated a net total of 7.2 million jobs. More job cuts were announced last week. Thermo Fisher Scientific Inc., which makes industrial and scientific equipment, said it will close a plant in Dubuque, Iowa, next year, costing 350 jobs.

Worries about unemployment are likely to continue to constrain household spending. Personal consumption spending likely began rising in the second half of this year, but is expected to remain low in 2010. Still, Americans aren’t expected to save as much as they have in past decades. The savings rate is expected to be above the 2 percent average of the past four years, but below the 9 percent average in the 1970s and 1980s.

The housing recovery is one bright spot. Forecasters expect 2010 to be the first year since 2005 that the housing sector will contribute to overall growth. Home prices are expected to rise 2 percent in 2010, but panelists do not believe that will stifle the housing recovery.

Inflation is expected to remain low due to the weak labor market and other factors. Thus, the NABE panel — which consists of 44 economists surveyed Sept. 2 through Sept. 24 — expects the federal funds rate to remain at its current record low near zero until late next spring, before a gradual rise begins.

“The good news is that this deep and long recession appears to be over, and with improving credit markets, the U.S. economy can return to solid growth next year without worry about rising inflation,” said Reaser.

Copyright © 2009 The Associated Press, Mae Anderson, AP Business Writer. All rights reserved.

” As publishers of media products, including guest guides, souvenir programs and web content for nearly every major motorsports facility in America, we have an intimate knowledge of the industry and what advertisers, sponsors and marketing partners look for.” said Tom Pokorny, President of Anthem’s Motorsports division.

Kasey Kappels of Jones Lang Lasalle (representing AMG), and listing agent Tim Davis of Coldwell Banker Commerical were the brokers on this transaction.

In our brokerage, we are hearing more reports of investors organizing funds to acquire distressed commercial real estate. I’ve felt for a couple of years now that this will mark the bottom of the market, when investors feel that that prices have stabilized, credit is fully tightened, and cap rates are at their peak. We have buyers on hand right now, with a standing offer to purchase property at a 12% cap, based on the current income, at its current occupancy level.  Before you scream how low that is – keep in mind this is a standing offer, cash, close in less than 30 days.

Its extreme pricing – but its real. It is the bottom dollar – and it is real money that you can have in 30 days, if your property is truly distressed. When you have a market conditions such as ours, this is encouraging. An investment group has stepped up and is willing to draw a line in the sand declaring that “X” is the minimum price for income producing property, and they will purchase anything that reaches that low price.

So, the shorthand version of the below story is as follows -

NREI surveyed 521 Commercial Real Estate investors – and from that data the assumption is that we are at the bottom of the commercial real estate market – or close enough to see it anyways.  Of the respondents in this survey

• 56% of them planned to purchase commercial real esate inside of the next 12 month period
• 46% of them planned to purchase inside of the next 6 months
• 23% are actively looking to purchase of commercial property. NOW.

The one theme through the article is that leading economic indicator the investors were looking to was a stabilization of job losses. When job losses reverse and show some gains, even slightly – all areas of the economy stabilize.

Full Article – Courtesy of NREIonline -

On average, investors have amassed $18.2 million for acquisitions. The online survey of 521 property owners was conducted in August by National Real Estate Investor and Marcus & Millichap Real Estate Investment Services.

Among those respondents who are amassing capital, 69% say they have either already started or plan to begin acquiring property over the next six months. Nearly half of respondents (46%) plan to begin acquiring property over the next six months, while 23% have already started making acquisitions.

Clearly, investors still have an appetite for commercial real estate despite ongoing problems in the U.S. credit markets and an erosion of real estate fundamentals. Slightly more than half of respondents (56%) plan to increase their commercial real estate investment within the next 12 months, up from 51% in the fall of 2008.

One-third of respondents expect investments to remain the same, while 10% of investors indicate that their real estate portfolios will likely decrease over the next 12 months. Among those who plan to boost their real estate holdings, the average increase is a modest 12.2%.

The latest investor sentiment pales in comparison to the results of the fall 2004 survey when 78% of respondents expressed their intent to increase their commercial real estate investment over the ensuing 12 months. “The recent numbers show positive movement, and we are seeing more buyers and sellers wanting to execute transactions as the pricing gap begins to narrow. The major obstacle is financing,” says Hessam Nadji, managing director at Marcus & Millichap.

The impact of the pricing gap and credit crisis are reflected in the steep decline in transaction volume over the past year. During the first seven months of 2009, roughly $22.4 billion in commercial real estate properties traded hands — about one-fourth of the $99 billion in property sales during the same period in 2008, according to New York-based Real Capital Analytics. Yet investors are clearly posturing to make a move.

Jobs remain key
Caution remains paramount as investors wait for more definitive signs that the economy has hit bottom before they pull the trigger on acquisitions. A key indicator investors are watching closely is employment data. “Job growth is the basis to fuel spending in all other sectors,” writes one respondent.

The U.S. economy shed 216,000 jobs in August, which is an improvement over the 270,000 jobs lost in July and 442,000 jobs lost in June. Still, the mounting job losses weaken demand for commercial real estate space and pose a major concern for potential buyers. The U.S. has lost some 6.9 million jobs since the start of the recession in December 2007.

Nearly four in 10 respondents (37%) expects a return of job growth within 13 to 18 months, while 21% expect a growth in employment to occur within seven to 12 months. Only 2% of respondents expect to see job gains within the next six months.

Typically, the commercial real estate sector lags behind the national economy by six to nine months, Nadji notes. “Therefore the job losses that continue, even though at a lower pace, will mean further pressure on occupancies and rents well into the second half of 2009 and the first quarter of 2010,” he says. Nadji anticipates that it may be the second quarter of 2010 before the real estate fundamentals hit bottom.

Investors are less optimistic about the outlook for effective rents than they were in the spring survey. Results vary depending on property type, but between 32% and 52% expect effective rents to be lower a year from now. In the April survey, between 23% and 38% anticipated a further drop in effective rents.

Respondents to the latest survey expect the office market to suffer the biggest blow with effective rents projected to fall 5.2% over the next 12 months, followed by mixed-use and retail (5.1%) and industrial (3.9%).

Investors report that property values have been hard hit. Across each product type, between 62% and 79% of respondents indicate that property values have fallen over the past six months.  Owners of undeveloped land report a sharp 20.6% drop in valuations over the past six months, the biggest decline of any property sector.

Looking directly at expectations for future values the majority of investors anticipate that values will remain flat or experience a further decline over the next six months. The largest percentage of respondents (44%) believe that hotels are most likely to experience a decline in values, followed by office (40%), retail (39%), and mixed use (37%). The most optimistic are apartment investors, as one in five expects values to begin increasing over the next six months and an additional 50% expect the values to remain the same.

There is no doubt that this was one of the most severe economic downturns that the U.S. has experienced in modern history. “We still face the drag from deleveraging, banks’ troubled assets and cautious consumers. But, the good news is that it looks as though the worst is over,” Nadji says. One encouraging factor is that there is a lot of capital on the sidelines. “Once confidence improves, the effect of that capital coming into the economy could be very positive,” he adds.

In addition, there has already been significant discounting in prices to attract buyers. Cap rates averaged 7.7% in July, up from 6.9% a year ago, according to RCA. However, it is important to note that this trend is based on closed transactions, of which there have been far fewer in the past year than is the industry norm. “Once buyers have conviction that the economic cycle has bottomed and credit markets improve even moderately,” explains Nadji, “we will see a more sustainable recovery in investment activity.”