US commercial property boom decades away - JLL

The end of summer is always slow...but in the Summer of '09, that is business as usual. If a recent report by Jones Lang LaSalle (JLL) is correct, our summer of discontent will last long into the next decade. Unless and until we are able to restructure and resurrect or replace the CMBS and RBS investment vehicles, liquidity will not return to the market and we will see continued declines in property pricing and no significant momentum in the market.

As reported today by Reuters, JLL recently issued a report that concluded the "level of U.S. commercialreal estate deals seen in the boom years of 2005 through 2007may take a generation to return."

It comes as no surprise to real estate practitioners that US commercial property sales in the first half of 2009 were down 80% from the same period in 2008 to $16 billion which is a whopping 93% decrease in volume from the $231.4 billion recorded in the first half of 2007 according to JLL's US Mid-Year Capital Markets bulletin. Of course, without momentum and cheap debt, prices are off 30 to 55% from prior periods.

- At just $5.2 billion, the second quarter sales activity was the lowest in recent years and down from $30.7 billion in 2Q08 and $114.7 billion in 2Q07 (an incredible 95% reduction in volume - no wonder appraisers are having trouble finding comps). With no CMBS market to turn to for cheap capital -and prospects for a quick recovery not promising, sales or properties are not expected to be robust anytime soon. Jones Lang LaSalle predicts that U.S. investors will slowlybegin to return to the market by mid-2010, though a return tothe boom years of 2005 through 2007 will take a generation orlonger. Instead of $231 billion a year in deals, U.S. commercialreal estate sales are likely to hover around $100 million onaverage for the first several years of the next decade.

JLL reports that cap rates have moved up a full 2.5 percentage points. Based on where cap rates were, this means that a property generating the same NOI could be worth up to one-third less. My opinion is that with increasing expensive capital being the only source and with the on-going perceived risk in the asset class, cap rates can be expected to increase until the rental market shows sign of recovery.

NOTE: the effects of the recession is being felt in the rental market as well as from the peak of the market to the end of the second quarter 2009, U.S. office asking rents fell on average 10% to 25%. Office leasing is down 25% to 50%.

Given all this, JLL predicts that prices for office buildings are not expected to begin to recover until at least 2012 because commercial real estate performance, which is based on job growth, lags the economy. The retail and lodging markets also will need additional time to recover as they depend on consumer spending and business travel.

This is an important point...demand for real estate lags the demand for the goods and services it houses as firms need to expand and employ to fill up their current space which typically is underutilized in a recession before they lease new space....

Be well and God-speed my friends...