Business Specialties
Investment
Aug 05, 2009
By: Barbra Murray, Contributing Editor
For the most part, the investment community has been holding back on commercial real estate acquisitions, waiting and waiting for the market to hit bottom. But according to a new report by CB Richard Ellis Investors, while the bottom may not be at hand just yet, it's close enough.
Speculation that the market bottom may be near is not pure speculation, there are three reliable indicators; history is one of them. As CBRE Investors' points out in its new quarterly report, the cumulative NCREIF Property Index depreciation over the last four quarters totals -19.1 percent (of note, the NPI experienced depreciation of -9.5 percent and -8.7 percent in the fourth quarter of 2008 and the first quarter of 2009, respectively). Comparatively, when observing the major real estate slump of the early 1990s, it took the NPI more than twice as long--an aggregate 10 quarters--to experience the same decline.
"This means that while the pricing downturn in the early 1990s took many years to bottom out, the current downturn is much steeper and, therefore, maybe shorter," the report notes of the first of the three indicators. "At this point, we don't know if we're at the bottom, but it appears we're pretty close, from the pricing perspective,” Lee Menifee, Global Strategy senior director with CBRE Investors, told CPN. "Over the last two or three months, there's been a firming of prices on income-producing assets with secure tenants, especially smaller deals."
In a ddition to the NPI pattern, the past behavior of publicly traded REITs acts as an indicator. U.S. REITs, over the years, have served as a leading indicator of private market pricing reductions and recoveries. REITs began their downward spiral in early 2007, while the NPI began its downfall in mid-2008. "Just as REITs led the private markets in 2007 and 2008," the report concludes, "it is probable that the recent share price recovery is an early indicator that a trough in private markets is coming soon."
The third sign that the bottom may be within close reach involves transaction volumes, and the fact that they are so low, there's only one way to go, and that's upward. "As cash constrained owners increasingly become unwilling sellers, transaction activity will pick up," according to the report. "An increase in sales will provide needed pricing information to both buyers and sellers. This transparency will both encourage more sellers to offer properties at realistic prices and provide buyers with the confidence to re-enter the market."
The credit market continues to20be quite inhospitable, but for those who are in the position to buy, the waiting game should be over. "If you are purely focused on not buying until the market hits bottom, then you are not going to buy until after the bottom hits," Menifee said. "The point is to be somewhere close to the bottom; if you're looking for absolute certainty, you won't get it." Some investors do get it. "German retail investors investing in open-ended funds are very active in the U.S. They took a breather in 2007 and shut down, but now they're looking for secure, income-producing assets."
Looking ahead, transaction volume is on track to increase, with more coveted acquisition opportunities on the horizon. "More deals will be coming to the market in the next 12 to 18 months as sellers become more realistic," Menifee explained. "The bid-ask gap is closing, although it is taking longer than everyone expected. But the big rush of capital back into assets is a ways off. There are still significant hurdles to overcome in terms of expectations of rent growth and leasing, but property prices are reflecting that; prices are reflecting that downside."
0A
So, now really is the time to buy; holding out for rock bottom may very well result in lost opportunities. "There's been so much focus on the downside, particularly over the last year, and there's been good reason to be mindful about buying properties," he said. "But much of the downturn has passed and much of the re-pricing has happened. You can still be in defensive mode, but you can buy properties on that basis. In the market now, there are more attractive opportunities, so you don't need to be an aggressive buyer to take advantage of those opportunities."
By: Barbra Murray, Contributing Editor
For the most part, the investment community has been holding back on commercial real estate acquisitions, waiting and waiting for the market to hit bottom. But according to a new report by CB Richard Ellis Investors, while the bottom may not be at hand just yet, it's close enough.
Speculation that the market bottom may be near is not pure speculation, there are three reliable indicators; history is one of them. As CBRE Investors' points out in its new quarterly report, the cumulative NCREIF Property Index depreciation over the last four quarters totals -19.1 percent (of note, the NPI experienced depreciation of -9.5 percent and -8.7 percent in the fourth quarter of 2008 and the first quarter of 2009, respectively). Comparatively, when observing the major real estate slump of the early 1990s, it took the NPI more than twice as long--an aggregate 10 quarters--to experience the same decline.
"This means that while the pricing downturn in the early 1990s took many years to bottom out, the current downturn is much steeper and, therefore, maybe shorter," the report notes of the first of the three indicators. "At this point, we don't know if we're at the bottom, but it appears we're pretty close, from the pricing perspective,” Lee Menifee, Global Strategy senior director with CBRE Investors, told CPN. "Over the last two or three months, there's been a firming of prices on income-producing assets with secure tenants, especially smaller deals."
In a ddition to the NPI pattern, the past behavior of publicly traded REITs acts as an indicator. U.S. REITs, over the years, have served as a leading indicator of private market pricing reductions and recoveries. REITs began their downward spiral in early 2007, while the NPI began its downfall in mid-2008. "Just as REITs led the private markets in 2007 and 2008," the report concludes, "it is probable that the recent share price recovery is an early indicator that a trough in private markets is coming soon."
The third sign that the bottom may be within close reach involves transaction volumes, and the fact that they are so low, there's only one way to go, and that's upward. "As cash constrained owners increasingly become unwilling sellers, transaction activity will pick up," according to the report. "An increase in sales will provide needed pricing information to both buyers and sellers. This transparency will both encourage more sellers to offer properties at realistic prices and provide buyers with the confidence to re-enter the market."
The credit market continues to20be quite inhospitable, but for those who are in the position to buy, the waiting game should be over. "If you are purely focused on not buying until the market hits bottom, then you are not going to buy until after the bottom hits," Menifee said. "The point is to be somewhere close to the bottom; if you're looking for absolute certainty, you won't get it." Some investors do get it. "German retail investors investing in open-ended funds are very active in the U.S. They took a breather in 2007 and shut down, but now they're looking for secure, income-producing assets."
Looking ahead, transaction volume is on track to increase, with more coveted acquisition opportunities on the horizon. "More deals will be coming to the market in the next 12 to 18 months as sellers become more realistic," Menifee explained. "The bid-ask gap is closing, although it is taking longer than everyone expected. But the big rush of capital back into assets is a ways off. There are still significant hurdles to overcome in terms of expectations of rent growth and leasing, but property prices are reflecting that; prices are reflecting that downside."
0A
So, now really is the time to buy; holding out for rock bottom may very well result in lost opportunities. "There's been so much focus on the downside, particularly over the last year, and there's been good reason to be mindful about buying properties," he said. "But much of the downturn has passed and much of the re-pricing has happened. You can still be in defensive mode, but you can buy properties on that basis. In the market now, there are more attractive opportunities, so you don't need to be an aggressive buyer to take advantage of those opportunities."
Recent Investment Headlines
Aug 10, 2009
Aug 07, 2009
Aug 07, 2009
Aug 07, 2009
Aug 07, 2009
Subscribe to this blog's feed
