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Investment-Sales Freeze Shows Signs of Thawing - 09/29/09
CRE News

The near freeze in the property investment-sales market over the past year has shown signs of thawing in recent weeks.

Brokers and analysts are hopeful that the recent uptick in sales volume and an increase in inquiries from property investors may be signs that an extended improvement in transaction activity is in store.

A total of 59 properties with a transaction value of $3.78 billion changed hands or went under contract in July and August. That compares with 39 deals with a combined value of $1.6 billion in May and June, and 189 for a combined $9.5 billion so far this year, according to Commercial Real Estate Direct's property-sales database.

And market activity thus far in September has been robust, fueled by some big transactions, such as the $207.8 million sale of 1999 K St. NW, a 250,000-square-foot office building in Washington, D.C.; the $116 million sale of a 75 percent stake in the FlatIron Crossing Mall in Broomfield, Colo., and the $115 million sale of the former WaMu Tower office building in Seattle.

Dan Fasulo, research managing director for Real Capital Analytics, said that transactions on larger properties are a sign that well-capitalized buyers, whose activity drove much of the large sales volumes recorded from 2005 to 2007, may feel comfortable enough with market conditions to again drive transaction volume.

"All signs point to a much stronger level of activity through the end of the year," Fasulo said. He also noted that last year's second half was among the real estate market's worst ever, as quarterly sales volume dropped 16 percent in the third quarter from the second quarter and another 46 percent in the following quarter.

Meanwhile, some brokers have noticed an increase in inquiries from both sellers and prospective buyers of commercial property in recent weeks. For example, the volume of those inquires at the capital markets group of Jones Lang LaSalle has doubled from the start of the summer.

"You can really feel that there's a groundswell of sales activity (about to occur), based on what we've been involved in in the past couple of weeks... special servicers are asking for opinions of value on assets and banks also are approaching us, as are prospective buyers from Asia and Europe," said Michael Zietsman, managing director of JLL's group in Los Angeles. "That may mean the sellers are still just looking to test the market for prices, but it would seem that interest in sales activity has picked up."

Likewise, Dan Peek, senior managing director of the national hotel practice at Holliday Fenoglio Fowler, said he senses "a substantial uptick in investor interest," noting that his office has also seen a recent surge in property valuation requests from prospective sellers.

"'The transaction market is at the percolation stage and whether or not it moves on to a boiling point, where we'll see more deals coming through, depends on several factors," added Victor Calanog, research director for Reis Inc.

Among the biggest factors are investors' overwhelming fears that the economic downturn has not been fully played out and that property values have further to fall.

Indeed, the latest edition of the Korpacz Real Estate Investor Survey predicts that the national commercial-property market will not fully recover until 2012 and rents over the next year will drop up to 10 percent for central business district office space, warehouses and retail power centers. The survey assesses the opinions of decision-makers at REITs, pension funds, mortgage bankers, developers, insurers and other institutional investors.

Meanwhile, Moody's Investor Service has predicted that property values, which have dropped 35.5 percent from their peak in late 2007 as measured by the Moody's/Real Commercial Property Price Indices, will drop another 4.5 percentage points before rebounding.

Moody's further noted that capitalization rates will rise another 100 to 150 basis points as unemployment increases, driving down occupancy levels and rental income at many properties.

But amid the weak economic outlook, there may be signs of improvement in another key impediment to investment sales - the gap in what sellers have been asking and what bidders have been willing to offer for properties. "We have heard that the bid-ask gap is narrowing," added Fasulo. "If you are a seller and not heard what is happening (in terms of price drops), you've been living in a cave."

Added Peek: "Pricing is becoming rational and we are seeing (transaction) volume picking up."

Zietsman said a clear sign that sellers are willing to drop prices has been massive portfolio valuation writedowns recorded over the past year by some institutional investment funds.

The NCREIF Index, which tracks equity investments in more than 5,000 properties acquired on behalf of tax-exempt institutions, recorded a 19.2 percent drop in valuation during the 12 months ended in the first quarter. Meanwhile, Zietsman said that writedowns have ranged from 30 to 40 percent in some of the open-end funds covered by the index.

The writedowns, he said, would reflect the pricing that the funds would accept for the properties they sell. Open-end funds, meanwhile, are among the institutional investment vehicles most likely to be selling since their structure allows investors to redeem their interests at any time.

A leader among open-end funds writing down their portfolio values has been Rreef's America REIT III. That fund in July agreed to sell the One Winthrop Square office building in Boston for $21 million, which was 19 percent below Rreef's initial asking price in March.

Sellers, however, have been slow to put properties on the market. According to scattered reports, investment-grade properties that hit the sales block at reasonable asking prices are generating more bidders than most transactions had attracted in the frothier investment markets of 2005 to 2007.

Peek, who works out of Miami, said his office recently sent out notices of a property offering to 30 prospective buyers and attracted formal bids from 10. "To get offers from (one-third) of your bidders is highly unusual," he said.

Further north in Tampa, Fla., reports are that an apartment complex offered at a price that would have resulted in an 8 percent capitalization rate attracted so much interest that the seller ultimately sold it at a 7 percent cap rate.

Calanog said that prices are rising and cap rates are dropping enough in some markets to indicate a possible "bottoming out" of values. But he stressed that the "transaction volume is still way too low to extrapolate any kind of trend."

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