Jones Lang LaSalle ULI Investor Sentiment Survey

Transcription

1 ULI Investor Sentiment Survey 3Q 2010 Page 1 Jones Lang LaSalle ULI Investor Sentiment Survey Results: 3Q 2010

2 ULI Investor Sentiment Survey 3Q 2010 Page 2 Jones Lang LaSalle Investor Sentiment Survey Results Property sales have already surpassed volumes for all of 2009, indicating that we are headed into the last quarter of 2010 with strong momentum in the US commercial real estate capital markets. In fact, August 2010 volume of $9 billion was double the level reached last August and near the average monthly volume we saw during the pre-bubble years. In light of this, it is important to step back and ask why capital is moving back into commercial real estate both on the equity and debt side with such velocity. Perhaps the biggest reason we are seeing investors moving back into real estate is the lack of relative yield in alternative investments. Government and corporate debt yields have plunged in the last few months. Currently, the yield on investment grade corporate bonds is in the low-to-mid 4% range and the 10-year Treasury is under 2.50%. Cap rates, on the other hand, which are slower to adjust, remain in the 7 8% range on average. Remarkably, the spread between commercial real estate and the 10-year Treasury is nearly 500 basis points, a near-record level. At the peak of the market, this spread was approximately 150 basis points. For foreign investors, the spread differential in the US is higher than in any developed economy, making US property an attractive proposition for offshore capital as well. The chart below shows the historical cap rate to Treasury spread along with monthly property sales volume. 5.2 $ % $60 Cap Rate to 10-Year Treasury Spread % % $50 $40 $30 $ % 1/31/2001 6/30/ /30/2001 4/30/2002 9/30/2002 2/28/2003 7/31/ /31/2003 5/31/ /31/2004 3/31/2005 8/31/2005 1/31/2006 6/30/ /30/2006 4/30/2007 9/30/2007 2/29/2008 7/31/ /31/2008 5/31/ /31/2009 3/31/2010 8/31/2010 Monthly Property Sales (billions) $10 $0 Cap Rate to 10-Year Treasury Spread Monthly Property Sales

3 ULI Investor Sentiment Survey 3Q 2010 Page 3 The strong return of the debt capital markets is another reason for the increase in sales volumes. Given the low index (i.e., the Treasury yield curve), lenders can charge significant margins generating healthy profits for themselves while still offering borrowers competitive rates. For the first time in what seems to be ages, borrowers not only have multiple options for debt capital but they are also able to generate positive leverage on their acquisitions. The ability to charge wide margins in the US has also caught the eye of foreign lenders. For example, German banks are consistently winning business in the US and will surely rank near the top of the list of most active lenders in In addition, the securitized markets are staging a rally with year-to-date CMBS issuance totaling $4 billion double the volume for all of The fourth quarter of 2010 may see the most active CMBS new issuance since 2007 with five transactions totaling over $6 billion in the pipeline. It is with this backdrop that Jones Lang LaSalle recently conducted its latest investor sentiment survey. The survey represents over 200 industry respondents including nationwide property owners, banks, agencies, development firms, academics, and professional service firms / consultants. The survey focused on the following key themes: investor mix, pricing floor, wave of distress, capital availability, market fundamentals, and preferred property sectors. When Jones Lang LaSalle conducted this survey in spring 2010, investors felt a marked turnaround from the uncertainty that had prevailed in the market for the past two years. Then, 74% of respondents indicated an interest in increasing their overall investment activities in 2010 compared with Now, just six months later, 8 of investors plan to increase their investment in commercial real estate over the next 12 months. 3 30% 30% Do you see your investment portfolio increasing or decreasing over the next 12 months? % 18% 8% 9% 12% 10% An overwhelming majority said volume would increase over the next year. 0% UP: 0-10% UP: 10- UP: 20-30% UP: 30-40% UP: 40-50% 3% UP: 50-60% UP: 7 or more DOWN: 0-10% DOWN: 10% or more Investor Mix With an increase in investment on the horizon, a new investor mix is expected to enter the United States commercial real estate market. Not surprisingly, most respondents (47%) expected China to be the most active investor likely buoyed by the strength of the Chinese sovereign wealth fund, CIC. While it is unclear how much CIC intends to allocate to real estate, indsutry experts estimate CIC will invest $10 - $15 billion in property over the next 18 months. German money took the second spot at 22% closely followed by Middle Eastern capital at.

4 ULI Investor Sentiment Survey 3Q 2010 Page 4 Australian 3% Other 7% UK 1% What do you expect to be the most active sources of international capital in the next 12 months? Not surprisingly, most respondents expected China to be the most active foreign investor. Chinese 47% German 22% Middle Eastern Pricing Floor Striking the right timing seems to be the challenge for investors who look to diversify their investment holdings by placing capital into real estate. The $64,000 question in today s market is: have property prices finally hit the bottom for this cycle? Encouragingly, this year s survey indicates that 43% said the market has already hit bottom or will hit bottom by year-end This is further evidence of a widespread market belief that the real estate capital markets are in recovery mode. The outlook for property prices to hit bottom in 2011 registered 34%, and 17% saw the floor in Wave of Distress As the market recovers the expectation of a wave of distressed commercial assets hitting the market is fading. In today s market, the greatest number of respondents expects no wave will ever hit the market (38%), following by 31% who belief distressed investment opportunities will still hit in Many investors (19%) believe that distress assets have already hit the market and will fully manifest in late Will the long anticipated wave of distressed commercial assets ever hit the sales market? The wave may not hit as the market continues to efficiently absorb distressed assets. No wave will ever hit the market 38% % Already hitting/late % % Comparatively, in Jones Lang LaSalle s spring survey, 40% of investors surveyed thought they would see opportunities to invest in distressed assets in 2010, while more than half of the respondents (53%) believed distressed assets would hit the sales market in It seems both sets of investor respondents are still looking to capture greater distress coming to the market, which may be increasingly difficult to find as the market continues to efficiently absorb assets.

5 ULI Investor Sentiment Survey 3Q 2010 Page 5 The Return of CMBS While the debt and equity markets have opened in the last six months since Jones Lang LaSalle completed its spring survey, the availability of capital remains a critical factor to most in the commercial real estate community. The return of CMBS was tepid at best in 2009, but investors expect a healthy increase in CMBS issuance in 2010 and Most respondents expect CMBS issuance to land in the $10 to $15 billion range for full-year 2010, but expect CMBS issuance to double in 2011 to the $20 to $30 billion range. 50% What do you expect CMBS issuance to be in 2010 and 2011? 4 40% 3 30% Most respondents said we would be in the $10 15 billion range in 2010 and expected issuance to significantly increase in % 0% Less than $10 billion $10-15 Billion $15 20 Billion $20-30 Billion $30 Billion+ Market Drivers and Performance Hindrances While the market feels that the commercial real estate investments have moved into recovery, there are still a number of factors that investors believe will pose the greatest challenges to placing capital in US real estate in the next 12 months. The greatest factor weighing on the minds of investors is the lack of clarity on the economy (31%). Additionally, 2 of investors feel that pricing is still at an unrealistic level and believe that servicers and banks will continue to sit on assets. Another expect there to be limited product availability. Exit strategy challenging 4% What do you expect will be the biggest challenge in placing capital in U.S. CRE in the next 12 months? The direction of the economy remains the biggest challenge facing investors. Pricing still unrealistic 2 Servicers and banks sitting on assets Limited product available No clarity on economy 31%

6 ULI Investor Sentiment Survey 3Q 2010 Page 6 With a number of very real concerns on the horizon, the vast majority of respondents (47%) characterized their mood about the commercial real estate landscape and their business prospects as challenging. Twenty-nine percent had mixed feelings about their future prospects, and 1 were optimistic. The low interest rate environment was also on the mind of investors. While 19% expect rates to remain exceptionally low, 38% believe rates will start inching up beginning in Preferred Sectors With the expected investment increase in investment, investors are evaluating the strength of commercial real estate sectors differently. Respondents strongly favor multifamily as the top performer in the next 12 months, followed by industrial, hotel, office and retail. In our spring survey, hotels edged multifamily out as the favored sector while the remaining three sectors held the same spots. Property Type Rank Multifamily 1 Industrial 2 Hotel 3 Office 4 Retail 5 Below we highlight some of the trends in each property group: Multifamily The multifamily segment has been the first to recover and has several positive forces working in its favor. The sector has seen positive absorption in 2010 and many markets are seeing solid improvements in occupancy and demand. Fundamental performance has surpassed expectations and geographically broad-based pricing power has returned to landlords. Fannie Mae and Freddie Mac continue to offer highly attractive financing to property owners and life insurance companies are entering the mix as well. The supply side remains relatively modest and demographic shifts are increasing the ranks of those with the highest propensity to rent. While the future looks promising for multifamily, there are concerns as well: while unlikely, the GSEs (i.e., Fannie and Freddie) could pull back from the sector and continued high unemployment could slow household formation. Industrial While vacancy in the industrial sector remains high, limited supply and improvements in global trade have benefitted the industrial sector. Global and domestic trade as indicated by the positive recoveries in freight volumes (air, rail, port) should find its way down to the industrial space. Sensing the bottom of the industrial cycle, investors will be eager to acquire industrial product in prime locations and financing for high-quality industrial remains readily available. Concerns in the sector include the supply of industrial-zoned land, continued high vacancy and the limited pricing power available to owners. Hotel Lodging demand has bounced back sharply creating cautious optimism for industry participants. Perhaps the biggest factor favoring the hotel sector is the lack of supply in the market. The construction pipeline has slowed considerably, especially in the higher-end and luxury segments. The largest concern with the sector remains economic uncertainty: travel spending will be among the hardest hit if the economy were to reverse its course.

7 ULI Investor Sentiment Survey 3Q 2010 Page 7 Retail Occupancy in the retail space has held up better than most had anticipated. In addition, the construction landscape for retail remains near zero and there have been surprisingly few retailer bankruptcies. Consumer expenditures have started to increase steadily through 2010 after falling sharply in Concerns include the lack of financing available as compared to other sectors (largely a function of the higher asset values of retail properties), tenant concentration in power centers, and continued economic uncertainty causing a reversal in consumer spending. Office The office sector has seen a vicious decline in rents that will take time to reverse. Positives for the sector remain in urban CBD markets where supply has remained in check and occupancy has held up fairly well. However, rents in general continue to fall especially in the suburban markets. Pressure from the large supply of sublease space is also adding to the pressures facing the sector. While rents will likely rebound, tenants have become wiser and are locking in long-term leases with generous concession packages smoothing out future NOI increases. The office space will continue to be bifurcated with the strongest markets (New York City, DC, etc.) clearly ahead of the pack with secondary cities seeing little to no attention from investors. Going Forward General investor sentiment heading into the end of 2010 is sharply higher than where it was just 6 months ago. With the worst of the revenue declines behind us, investors are seeing a floor in commercial real estate prices and are actively looking to place capital. While fundamentals remain pressured, the significant premium offered by commercial real estate and the return of debt capital has created an attractive environment for property investment. The multifamily, industrial and hotel markets will likely lead the recovery heading into 2011 while office will remain the most challenged property sector. Although there continue to be legitimate concerns on the direction of the economy, we believe this will not hinder the rally we are witnessing. Even as downside risks remain, it will take several months of negative data before investors change their course. Assuming this will not be the case, we look forward to seeing a continued rebound in the commercial real estate capital markets. For more information, please contact: James Koster President Capital Markets jay.koster@am.jll.com Benjamin Breslau Managing Director Americas Research benjamin.breslau@am.jll.com