Real estate services and investment firm Grubb & Ellis Co. has predicted a slow recovery in the leasing market for all property types in the coming year.
Meanwhile, activity in the investment market, which started its recovery earlier than expected last year, will go further than the assets at the top and bottom of the quality scale to include properties with slightly more risk. These predictions were made in the firm's 2011 Real Estate Forecast.
According to the forecast, last year both investors and lenders on a nationwide basis started to re-enter the market, with the main focus on minimizing risk.
The core, majority-leased assets were in strong demand, most of the time receiving multiple bids. On the other hand, distressed, low-occupancy assets traded at modest prices. The properties that fell between these two extremes – for instance, suburban assets in second-tier markets – were mostly unsuccessful in terms of attracting buyers and underwriters.
The lenders and investors will broaden their search parameters this year. This will, in turn, lead to more activity for riskier properties. The prices for the best properties will stay strong, but the national price indexes might be tempered by the riskier properties in the sales mix, according to the firm.
According to Grub & Ellis, New York is among the most desirable markets for real estate investors worldwide, and given that the economic recovery now in motion, 2010 investment activity – and pricing for the city’s best properties – increased close to 50% over that of 2009. Specifically, foreign investors were active in the market, comprising 30% of all activity on sales of more than $10 million.
Distressed assets also traded at increased levels. Seven out of the 10 biggest office sales in New York in 2010 were partial interest sales, which shows that over-leveraged owners are utilizing the current investment climate to recap their properties via opportunistic buyers. Liquidity issues have also remained, with owners addressing their challenges by re-negotiating debt, recapping partnerships or refinancing.
“All things considered, 2010 was actually better than most anticipated it would be – we saw positive net absorption and an uptick in investment sales during the second half of the year, positioning us for continued recovery in 2011,” said Robert Bach, senior vice president, chief economist of Grubb & Ellis. “We have challenges to overcome, and we don’t expect fundamentals to return to their pre-recessionary peaks for several more years, but we’re slowly and cautiously building the foundation necessary to do just that.”
Bach added that with all of the capital that lenders and investors have available, they are more likely to look at deals that are farther off the ‘fairway’ compared with what was seen in 2010 given that the capital markets are starting to thaw.
“Look for investors to broaden their horizon beyond trophies and trainwrecks, which should result in a 75 percent increase in transaction dollar volume from 2010 levels,” he said.
Meanwhile, Grubb & Ellis said that the New York area CRE market has shifted considerably since the beginning of the recession, with financial services firms no longer serving as a driver of market demand and few large firms signing the considerable leases the market has come to expect. Coming into this new year, tenants are fully cognizant that the days of low rental rates as well as ample chances to upgrade to higher-quality space are numbered, the real estate firm said. But, this will most likely drive more decisionmaking and increased activity in all product types.
“The Manhattan commercial real estate market saw slow improvement in 2010 – progress corresponding to the slowly improving U.S. economy but still hampered by sluggish job growth,” said Joseph Swingle, executive vice president and managing director of Grubb & Ellis’ New York-area offices. “We expect increased recovery in 2011 as tenants, owners, investors, retailers and the general public gain confidence in the economy.”
On a national basis, Grubb & Ellis said that employers are probably going to add merely 1.5 million net new payroll jobs in 2011, which is right at the level needed to accommodate the growing labor force. However, this is not sufficient to considerably offset the unemployment rate, generating a modest recovery in the office market.
Uncertainty in terms of employer health care costs could further discourage hiring, particularly among small businesses. Firms that are dealing with these as well as other challenges will still focus on controlling occupancy costs.