Sunday, December 19, 2010

2011 Outlook: Opportunity Outweighs Uncertainty in CRE/CMBS Markets

If 2010 was a year marked by uncertainty, then 2011 should shed some much needed light on the future of CRE (Commercial Real Estate) market.  Despite the hurdles of the financial crisis and its impact on commercial real estate, recent data suggests that investors are looking to expand next year as the economy enters into a slow recovery. 
Low interest rates, (spurred in large part by the fed’s new phase of quantitative easing), along with the resurgence of several asset classes such multifamily, indicate that investors may be willing to take on slightly more risk next year.  Compromises on tax cuts and the historically wide spread between cap rates and interest rates should also aid investment and reduce uncertainty, creating opportunities for broker-dealers.      
How will different CRE classes perform next year?  To some extent, we have already begun to see a return to normalcy in some sectors such as industrial and multifamily.  These markets have already begun to reset themselves and are poised for continued growth in 2011.  Debt is coming back, and where the debt goes, the equity will follow.  
Projected sales volumes for 2010 have also shown a promising improvement of ’09. This is not a shock considering how poorly the market performed in ’09, but it is still good news.   CRE sales volumes are projected to increase over 50% or about $168 billion by the end of year, as investors who sat on the bench in 2009 returned to the market. 
Not all sectors are benefitting equally from the return of debt.  While financing is available for top-tier properties, it has been reserved mostly stable property types grounded by experienced owner/operators. Investors this year are still risk averse, with the majority of investment activity focused on stable investments in top tier, primary markets.  Institutions and REITS have returned, but they remain cautious. 
In 2011, assets located in primary markets will continue to experience the biggest boost from capital flows, while mid- and lower-tier assets in secondary and tertiary markets will need exceptionally strong owner/operators with a strong track record of success to gain financing.  The recovery of these markets is tethered to job creation, so they will require the economy to improve before these assets can fully recover. 
At the end of the day, there will always be appetite for commercial properties that provide investors with good value. Assets that bring cash flows, such as office, healthcare and multifamily, have already seen increased demand in both primary and secondary markets.  With new supply limited, there is a real opportunity for buyers to invest in the CRE at the equity and mezzanine levels while the gap between interest rates and cap rates remains historically wide.  Debt capital is readily available for projects that can prove long term value with experienced owner/operators that have a track record of success.   
Overall, the future is looking up for the CRE market next year, as more investors take advantage of market conditions and an improving economy.  While risk appetites remain low, early movers looking to broaden their investment strategy will begin to look outside of the top tier markets.  These players will be the first to capitalize on the next round of price corrections and reap larger rewards in the years ahead.  Brokers with strong lending relationships and experienced development partners will be poised to take advantage and emerge as winners in the next phase of recovery.    
-Matthew McManus
Matthew McManus is Chairman of Philadelphia-based NAI Bluestone Real Estate Capital, LLC.