The monthly CBRE August Cap Rate survey is out, and unlike recent months, the outlook for commercial real estate is turning more dour. CBRE's commentary: "As the US economy slows from its growth over the past six months, activity is expected to be more moderate for the remainder of the year. This is partly due to the fact that a few government stimulus programs are coming to an end, along with the fact that job growth remains slow. According to Economy.com the gross domestic product is expected to grow 2.7%, which is a reduction from the 3.0% that was originally projected for 2010. On the upside, corporate profits are steadily increasing and business capital spending is expected to continue to rise. Commercial investment activity and interest have increased in the first half of 2010, but the prevailing challenge continues to be a shortage of suitable product." None of this takes away from the fact that commercial real estate, which has long been the bubble within a bubble, continues to subsist purely on the premise of the (ever) greater fool theory, in that ML's research and underwriting desk will be able to find those to sell equity to in an attempt to delever almost a trillion in REIT debt maturing by 2012. Failing that, the firm will merely extend maturities and roll the debt when the time comes: as recent weeks have taught us, there is no shortage of lunatics chasing yield, believing that High Yield is fixed income, when it is really just a high beta equity play on distressed names.
It most certainly would not be a CBRE report if there was not a section focusing on the rosiness of the second coming of the depression. And yes, we henceforth will dub anyone who uses the phrase "[blank] on the sidelines" an incorrigible idiot, as demonstated conclusively earlier this is a validation of the worst form of financial incompetence: not knowing that balance sheets have liabilities in addition to assets. Anyway, back to CBRE's CRE "pros":
- There is still pent-up equity demand. According to The Institutional Real Estate Letter published by Institutional Real Estate, Inc., there is
approximately $135 billion of unspent equity “sitting on the sidelines”. This could bode well for sustaining the recent increase in investment
- Nine CMBS platforms (and counting) are back on the market. Continuing the trend started in the latter half of 2009, the US CMBS
market is slowly picking up steam with $2.4 billion in issuances through the first half of 2010, which closely matches the levels seen
during all of last year.
- Several large transactions closed in the first half of 2010. Several portfolios, including the $420 million DDRTC Retail Portfolio, as well as
high-profile transactions such as the $193 million disposition of 600 Lexington Avenue in New York, highlight the overall sales activity. Clearly, there is capital capacity for large transactions, a sharp contrast to a year ago.
- Credit market conditions, particularly proceeds availability, continue to improve somewhat, helping to catalyze the investment market
rebound. Recently, life companies and several regional banks have stepped up their lending programs. CBRE has seen a substantial increase in loan originations with both lender profiles, with competition resuming in the way of rates, terms, and proceeds for highly sought after financing. The “middle of the fairway” as to what is acceptable is beginning to expand as well.
- Leasing trends appear to be turning the corner. Based on the most recent CBRE Econometric Advisors (CBRE-EA) reports, the decline in net
absorption for both the office and industrial sectors has leveled off. In fact, CBRE-EA forecasts positive net absorption for both sectors by the end of the year. This positive outlook should promote more investor activity in the near term.
The full report can be found here.