As a storied 2010 comes to a close, I thought it a good time to offer my observations on the 12 months past, and to present my outlook for the economy and the commercial real estate market for the year ahead. Before I do, however, I would be remiss if I did not thank the Sperry Van Ness clients, Advisors, staff, and fellow brokers for their contributions to our strong year. I know that I speak for all SVN Advisors and staff when I wish you a safe holiday season and a prosperous New Year.

A Strong Close to 2010

Following two years of unprecedented upheaval, commercial real estate market conditions have improved markedly over the course of 2010. In the final days of December, Real Capital Analytics reports that the rush to bring deals to closing has pushed national transaction volume for the year past the $100 billion milestone, roughly doubling the market’s tally for 2009. This improvement in property sales reflects investor confidence in the long-term prospects for our industry as well as improvements, though sometimes modest, in supporting measures of economic and job market activity.

Coinciding with rising sales volume, broad measures of property prices have also firmed in 2010. Over the last three quarters, cap rates have fallen for virtually all property types. The gulf in pricing expectations that separated buyers and sellers in 2009 has narrowed, closing the “bid-ask” spread and allowing more parties to come to agreement. More confident in market valuations than during the depths of the recession, lenders have shown increasing eagerness to make loans for high quality property sales in recent months. While many banks are drawing down their commercial real estate portfolios, the CMBS pipeline is now reestablishing itself with roughly $15 billion of securitization projected for the first quarter of the New Year…a positive combination of events, indeed.

Imbalances in the Recovery

The overarching trends show an industry on a sustainable path of recovery. But as with any recovery that is not backed by a robust economy, the last year’s gains in commercial real estate investment activity and pricing have been uneven. Similarly, mortgage-financing terms have improved in the strongest investment markets while credit too often remained constrained elsewhere. Our team is acutely aware that the headline statistics of national sales activity do not properly convey these differences across our broad array of markets.

For much of the last year, the weight of institutional investor and lender interest has favored larger deals in a small group of coastal markets. Capital inflows to these markets have been unusually concentrated, pushing prices higher. According to the Moody’s/REAL Commercial Property Price Index, based on data from Real Capital Analytics, property prices have come off their lows. In the top three markets – New York City, Washington, DC, and San Francisco – they have done much more than that, rising 38 percent since 2009. As competition for trophy assets in these markets has intensified in recent months, a handful of record-setting deals have been added to the rolls. While that is welcome evidence of the market’s improving vigor, gains in the $500 thousand to $5 million segment of the market have lagged trends for larger properties in 2010, as has investor appetite for assets in non-primary markets. This, however, is quickly changing, and secondary and tertiary markets are back on the radar screens of opportunistic investors.

At the year’s close, the transaction record shows clearly that greater momentum is building in a wider range of markets and for a more diverse pool of properties than even just a few months ago. It is with this in mind that I offer some thoughts on the outlook for 2010:

The Economy

At this time last year, I described a scenario of measured growth in 2010, characterized by slow but sustained expansion in economic activity and an eventual return to business hiring. Consistent with these projections, the economy has expanded at a modest pace over the last year. Regrettably, the expansion has been insufficient to dent our national unemployment challenge. Barring any unexpected shocks, such as that which might result from a serious deterioration of sovereign debt conditions in Europe, the outlook for 2011 is brighter. The consensus among economists and industry leaders points to a much-needed acceleration in growth in the coming quarters, supported by the extension of tax cuts and the temporary payroll tax holiday. Consumer and business confidence has improved as well, benefiting retail spending and business investment and inventory levels.

While job growth has been flat out disappointing, leaving too many American families out of work this holiday season, employment has stabilized tremendously over the last year. Key to the stabilization of commercial real estate fundamentals, employers created almost one million net new jobs in 2010. In 2009, in contrast, employers cut nearly five million jobs. While current employment trends fall far short of healthy levels, the return to even modest job growth has ended the freefall in property rents and occupancy levels that has undermined buyer confidence, sense of value, and should be viewed as a good sign. With a stronger growth potential in 2011, we can look forward to more sustained job creation and further stabilization in property cash flow. A long road lies ahead, I’m not underestimating the challenge before us, but employment is trending in a positive direction.

Investment Activity

Following December’s year-end rush of closings, activity may appear to lull in the early months of the New Year. Offering volumes and deals now coming into contract portend a sustained improvement in activity underlying these seasonal fluctuations. As for how the market landscape will evolve over the next year, several key issues now dominate the drivers of investment trends:

More Balance Across Markets

Already evident from recent transaction activity, the erosion of yields in the most visible markets is now leading investors to broaden their sights. Buyer interest in relatively smaller-scale assets and in secondary and tertiary markets is on the upswing. Of course, the outlook for property fundamentals remains a consideration for many potential investors in these markets. As a result, improvements in pricing and sales volume have clearly favored high quality assets with strong tenant rolls and limited short-term exposure to leasing risk. Assets with this level of stability, and which are located in non-primary markets are now receiving considerable attention, which is another indication of an improving market. Investor willingness to geographically diversify will increase markedly in the coming quarters.

Less Distress But More Distress to Buy

Opportunities to invest in distress have been growing in 2010 though distress sales have not been allowed to overwhelm the market. Expect this to continue. For many investors, this controlled approach to distress management by banks and other lenders has been frustrating. The availability of distressed properties in the for-sale market will continue to increase in 2011, supported by generally improving investment conditions, and lender willingness to cleanse their balance sheets. But the floodgates will not be released and prices for these assets will remain higher than during previous cycles. Note sales will continue to play an integral part in the distressed asset market, and we expect loan sales volume to increase significantly in 2011.

Rising Interest Rates

One of the emerging challenges facing the industry results from rising interest rates. Up to now, the recovery has been supported by extraordinary interventions by the Federal Reserve, an absence of inflation, and very low interest rates. This combination of circumstances has kept borrowing costs low for qualifying investors and has also eased the path to refinancing and, in distress situations, modification of loans. In recent weeks, long-term interest rates have been rising even though inflation remains subdued. Already, higher treasury rates have resulted in a rise in 30-year residential mortgage rates, dampening the outlook for housing markets. In the arena of commercial real estate, we will have to remain watchful for the impact of rising interest rates on cap rates and the impact on borrowing costs. While cap rates will not necessarily rise with interest rates, lenders may be forced to raise lending rates.

Conclusions

• Buying into the recently firmed US market now, taking advantage of low interest rates (which have nowhere to go but up) is a strategy that many astute investors will implement. This said, we will not see a “rush” of activity stemming from the newly established pricing floor.

• Given the market’s positive momentum, locking-in historically low lease rates (for 5 & 10 yr. terms) will become much more prevalent in 2011. H2 leasing volume levels suggest that this is already occurring.

• Geographic diversity and a willingness to pursue quality investments in secondary & tertiary markets (where spreads are greater, competition is weaker) is a key to re-entering the market in 2011. We will see much more of this in the year ahead – first with performing assets in secondary markets, followed by same in tertiary markets.

• As opportunities to invest in distressed assets remain less than plentiful, real property investors will look to note acquisitions with more interest. In many respects, a note purchase will continue to be the shortest path to real property ownership of troubled assets.

• 2011 will represent a calendar year of overall recovery – more balanced than we saw in 2010, but not without fits and starts.

Via CitzBizRealEstate Atlanta, commercial real estate services provider Cassidy Turley recently analyzed the election results, and opines that the chances for major changes are not very great, noting that “divided” governments of the past have seen growth in government spending and the size of government… And they feel that the nature of this “lame duck” government will not be positive for business. However, they do feel that almost 4 million office jobs will be created over the next 5 years.  And introduction to the report begins:

Since World War II, the US House of Representatives has changed political parties seven times. Last week’s mid-term elections turned the shift of political power for the next two years in favor of the Republican Party in the House. With a divided Congress and opposing political parties controlling the Executive and Legislative branches, there are numerous implications for commercial real estate. Cassidy Turley Research provides a brief outlook on the mid-term elections in relation to federal debt, legislation, US employment, and the commercial real estate markets.

For a link to the entire report, click HERE.  What do you make of their assessment?

As we have been writing over the past 3 or 4 weeks, there are more and more signs and reports that commercial real estate prices may be at or very near to the bottom. Perhaps the election results will also have a positive effect on commercial real estate. The latest report comes from CoStar, offering:

Investment grade real estate continued its positive trend from August with a strong 5.48% increase in September, according to CoStar Group’s newly released Commercial Repeat-Sale Indices (CCRSI).

Also, for the first time since the second quarter of 2007, all four primary property types within the commercial real estate repeat sales index (office, retail, industrial and multifamily) showed an increase in pricing in the third quarter.

The CoStar investment grade real estate index remains down 4.89% from the same period last year, and down 29.08% from two years ago. However, for the third quarter, the investment grade real estate index increased 5.46%. This is a significant reversal from the previous quarter, as the investment grade real estate index was down 3.24%. The CoStar investment grade index is therefore showing positive price movement quarter over quarter.

For links to CoStar for the full report, click HERE.  What do you make of the increasing reports pointing towards a stabilization?  Is this what you are seeing in your market place?

We are seeing more reports almost daily that we may be at least near equilibrium regarding distressed CRE.  The latest report from GlobeSt.com offers:

Delta Associates will report later today that US distressed commercial real estate has hit a plateau. If that sounds familiar, it is–the research firm declared in its last quarterly report that signs were mounting that distress was peaking and heading into a long period of plateau. “We were right,” Delta CEO Greg Leisch tells GlobeSt.com.

For the rest of the story, click HERE.

We have some auctions coming up in November:

• Benson, ARIZONA  |  November 17, 2010 — ONLINE ONLY!   Restaurant Building
• Salton City, CALIFORNIA | November 17, 2010 — ONLINE ONLY!   2.06 Acres of Land
• Orlando, FLORIDA | November 17, 2010 — ONLINE ONLY!   Gas Mart REO
• Port Wentworth, GEORGIA | November 18, 2010 — ONLINE ONLY!   19 Residential Lots
• Northborough, MASSACHUSETTS | November 17, 2010 — ONLINE ONLY!  High-Image Office Building
• Clayton, OHIO | November 4, 2010   Land for development, Village of North Clayton
• Garibaldi, OREGON | November 17, 2010 — ONLINE ONLY!   Gas Mart REO
• Rock Hill, SOUTH CAROLINA | November 9, 2010 — ONLINE ONLY!   79,500 SF Industrial Building
• Chester, SOUTH CAROLINA | November 11, 2010 — ONLINE ONLY!   83,998 SF Industrial property

According to Bloomberg, commercial real estate is “moving up.”  This would help to confirm the sense we are also getting that conditions are improving.  From our Sperry Van Ness associates nationally, activity is increasing.  And more sellers are now ready to consider using auctions to move commercial real estate. The article begins:

Conditions in the commercial real estate market improved nationwide in the third quarter with all seven property types moving out of weak rankings, a study released by Moody’s Investors Services on Thursday showed.

For the entire Bloomberg article, and specific stats from each asset class, click HERE.

What about you?  Is commercial activity increasing at all in your market or firm’s efforts?  Please tell us in the comments section below.

We’re seeing many headlines this week on Bank of America’s and GMAC’s announcements that they will resume foreclosure filings.  Coverage ranges from positive to indifferent to negative.  Regardless, this news prolongs turmoil that is swirling within many banks, and continues to impact their stock prices, and stock prices need to rebound for banks to feel comfortable in continuing to dispose of non-earning assets (foreclosed properties and non-performing loans).

Banks Restart Foreclosures via WSJ.com

Mortgage Securities Show U.S. Foreclosure Crisis Overblown: Credit Markets via Bloomberg

During last week’s Urban Land Institute fall meeting in Washington, DC, the FDIC was praised for it’s program for disposing of real estate from nearly 300 failed banks, which has totaled approximately $620 billion in assets. Builderonline.com reports the efforts of the FDIC:

The assets themselves have been a diverse bunch, ranging from massive portfolios of condo deals to single-family residential loans, REOs; and acquisition, development, and construction (AD&C) loans for residential and commercial projects…

…The deal options have typically included cash sales, loss-share agreements which limit the buyer’s potential losses on a deal, or structured transactions that offer successful bidders some type of leverage or financing to overcome the obstacles of what might otherwise be a very complex transaction.

That last option—a structured transaction, where the FDIC offered 0% financing to the buyers—was the choice for the failed Corus Bank’s $4.5 billion portfolio of condo loans, which was won by Starwood Capital Group in 2009.

“Providing 0% financing was genius,” said Barry Sternlicht, president and CEO of Starwood Capital. “We moved our bid $500 million. We can do math, you know.”

To read the rest of the article, click HERE.

Earlier this year, Sperry Van Ness’ auction team, Sperry Van Ness Accelerated Marketing, inked a strategic partnership agreement with online commercial property platform AuctionPoint. Through this agreement, AuctionPoint will power all of Sperry Van Ness’ online auctions.

This partnership allows Sperry Van Ness to offer property-specific online auction websites complete with property details, pictures and due diligence materials.  Bidders can enter an auction room and register to place a bid, and brokers will be able to qualify each bidder.  On auction day, buyers place bids in real time, creating market efficiency through technology.

“Sperry Van Ness is committed to offering our clients the most advanced strategic solutions available,” president and CEO Kevin Maggiacomo said in a statement. “Online auctions are revolutionizing the commercial real estate industry, and we want to help our clients participate in this new and highly effective way of doing business.”  All of Sperry Van Ness’ nearly 900 advisors will be able to offer their clients online auctions.

A new posting by The Distressed Debt Alert points out that CMBS problems continue to grow, with hotel loans remaining the worst-hit.  The report states:

Loans on hotels properties once again showed the sharpest increase in delinquencies of the major property groups, with a 41-basis-point jump, bringing the rate to 19.33%. At the other end of the spectrum, multifamily-housing delinquencies dipped 10 basis points to 14.43%.

For the full report, click HERE.