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No one can predict the future with absolute certainty. That’s why we sat down with a group of commercial real estate investors, operators, deal makers, thought leaders and financiers in December – to better understand the current state of commercial real estate and to gain a view on how we can prepare for the future.
The questions were simple: What happened in 2010? What should we expect in 2011? What dangers still lurk? What opportunities lay hidden from view? How should we prepare?
The discussion that followed resisted simplicity or easy answers. Everyone in the group challenged assumptions and continued their search for clarity, direction and strength despite a time of rapid and often disruptive change.
What Just Happened?
2010 may have been disappointing for some, but there’s little doubt that it was better than 2009, with a doubling of transaction volume (RealCapitalAnalytics reported over $130 billion in new transactions for 2010), falling cap rates for stabilized properties, some improved leasing and gradually healing banks. The amount of outstanding distressed assets, including REO’s and properties classified as “troubled” began to fall, but it still amounts to over $170 billion and with every new lease or renewal, average rental rates are either flat or declining.
Charlie Wurtzebach of DePaul University summed up the year that was by flatly declaring, “The fundamentals have not improved and yet cap rates are falling.”
Mary Ludgin of Heitman LLC quickly added more detail to the picture, “Depending on which property type you’re talking about, property markets only barely improved with apartments doing better while office and industrial hit the bottom. But the capital markets went through a rebuilding year – with far more liquidity than we would have predicted a year ago. It was a time to focus on survival, recovery and preparing for better times. Friedrich Neitzsche would have appreciated this year’s market, it truly was a time of ‘that which does not kill us makes us stronger.’”
Although the group laughed at the thought that Mr. Neitzsche was perhaps a closet real estate developer, the themes of rebuilding and renewal resonated with everyone.
Jason Choulochas of Wrightwood Capital was positive but a bit more granular in his assessment of the year. He described how 2010 didn’t really get started until halfway through the year. “The first half of 2010 was just 2009 version 2.0. The market was still dormant in the first half, but the second half marked a significant change in investor sentiment, in transactional activity and in capital flow.”
Jason continued, “By historical standards, we’re still at numbers that are a fraction of where we were before the recession, but the trend line started going in the right direction – and is starting to increase at a non-linear, perhaps even exponential rate. We are nowhere near back to 2007, but it seems that the pace of capital markets recovery is starting to exceed expectations of a year ago.”
“But there is a significant separation between Main and Wall Street right now.” Charlie pointed out. “There was approximately $25 billion of CMBS in 2010, but in the context of the entire market, that isn’t very much. The way I view things is this: In 2009, we were banging our heads against the wall every 15 seconds, but in 2010, we just did it every 30 seconds – so we all felt a little better.”
Charlie reflected the sentiment of many in the room when he continued, “The fundamentals of the market are at great risk relative to the capital flows. There seems to be a lot of risk in the market that we don’t want to look at too closely – just because we are all more than ready to stop banging our heads against the wall.”
Adding to the less than confident nature of 2010 was the unceasing pressure of troubled debt portfolios...