Global Real Estate Capital Markets Blog
Hi, I am Janice Stanton head of Investment Strategies, based in New York. Together with my international counterparts in London, Paris, Frankfurt, Singapore and Dubai, we will be bringing you capital markets trends and insights into investor activity on a global basis.
Kicking off our blog will be an overview of the market conditions in each of our major global markets beginning with the US in this week’s blog.
The US commercial real estate equity market has experienced a tremendous rally over the last six months, not dissimilar to what we saw happen in London last year. Currently, some of the best assets in the top 5 markets (NY, Washington DC, San Francisco, Boston and Chicago) have recovered to at or near prior peak market pricing. But the recovery is not uniform, with the top markets benefiting disproportionately. Read on for where we see the greatest recovery and opportunity in the coming months…..
The US Investment Sales Recovery
One of the biggest market challenges of the 2009-early 2010 US investment market was the opaque nature of pricing given bid/ask spreads and the lack of transaction volume. That is changing with 2010 investment activity up by approximately 70%. C&W’s capital markets transaction pipeline is up 150% since the first quarter, and we forecast year-end investment volumes to be twice 2009 levels. That said, given last year’s dismal activity levels (down 90% from the market peak), this will only be about 20% of prior peak volumes, and many of the secondary and tertiary markets continue to struggle with a lack of activity.
US Capitalization Rates by Core Property Type
Annual Weighted Average by Quarter 2009Q1 – 2010Q2
*Due to limited activity, cap rates are unreliable discontinuous.
Source: Real Capital Analytics Inc., Cushman & Wakefield Capital Markets Group
Many transactions that did clear the market up until early 2010 were distressed sales, and reflected approximately 45% peak-to-trough price diminution. But within the last 6 months, we have recovered approximately half of prior losses on average, with the best markets and assets recovering to at or near prior peak pricing. Signs of investor confidence in the major office markets is evidenced by the June 2010 sales of the Evening Star Building in Washington DC (at almost $800 psf and a sub 6% cap rate), and 300 North Lasalle in Chicago (at $500 psf and a 6.2% cap rate). Just recently, in New York 510 Madison Avenue was recapitalized at north of $1,000 psf, and currently in Boston, C&W is in the market with the John Hancock transaction—the largest single office asset brought market in the US this year.
The bifurcation of the market recovery–with the best assets having rallied the most is consistent with lenders’ willingness to be aggressive on top assets and markets. Investors can still get discounts to replacement cost in many cases and these markets do not have an overhang of new construction, unlike many secondary/tertiary markets. In the secondary/tertiary markets, there remains a “wait and see” attitude towards investing. Investors are cognizant that the US will be challenged by a painful delevering process over the next 5 years, as 5-7 year fixed rate CMBS loans issued at peak pricing years 2005-2007 come due. And there is an expectation that this may result in a distressed sales buying opportunity.
Despite the still fragile US economic recovery, investment activity is benefiting from strong capital flows to real estate. 3 of the 4 quadrants of real estate investment capital (private debt and equity and public equity) are once again quite active. Equity investors are aggressively competing for top quality product and C&W has moved from an average of 9 bids on CBD office product last year to 14 bids this year. Foreign investors from Canada, Europe, Asia and the Middle East are aggressively pursuing deals in the top 5 markets, and C&W is seeing a significant amount of interest on major market transactions come from cross border capital. That said, domestic investors are more aggressive for the most part; they have been on the sidelines for the last two years and some are nearing the end of their investment window for committed capital, this has contributed to the stiff competition for scarce top quality product.
Some investors have questioned whether pricing will ease once this first wave of institutional buying appetite is sated, but cheap debt and properties trading at discounts to replacement cost support long-term investor commitment to the sector.