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Investment Sales Volume Seen More Than Doubling to $100B in 2010 - 12/29/09

Sales of office, retail, multifamily and industrial properties could exceed $100 billion in 2010. That would more than double the $45 billion projected for all of 2009, according to Real Capital Analytics.

"We have hit bottom and are starting the new decade on the upswing," the New York research firm said.

The projected increase would be the first year-over-year gain in investment-sales volume since 2007 when it rose 32% to $439 billion. In 2008, volumes had plunged to $133 billion.

Real Capital noted that credit markets have shown signs of thawing, which could help facilitate sales in 2010. It added that capital raising by investors has been strong this year, led by REITs, which raised $28.3 billion this year, including $17.2 billion of equity from 59 stock offerings.

While REITs have used much of the money raised to pay off maturing debt, Real Capital said they still figure to "dominate in acquisitions in 2010." Some REITs have already accumulated substantial war chests and are deploying them.

For instance, Simon Property Group this month agreed to buy the Prime Outlets affiliate of Lightstone Group in a deal that values the company at $2.33 billion.

In addition to REITs, a number of investment managers have raised capital to take advantage of potential opportunities. And much of that has yet to be deployed.

Exactly when the sales rebound begins is tough to predict. Property owners are not yet pressured to sell. And, by most accounts, the gaps between what they are asking and what investors are offering remain wide.

"For now, it's still a dilemma with buyers saying they don't want to go first," for fear they might overpay in what is a falling market, said David J. Lynn, head of U.S. research and strategy for investment manager ING Clarion Partners. "And before they go first they're saying they want an optimal payout."

Ross Moore, executive vice president and director of market and economic research for Colliers International, said, "It's more a matter of buyers still waiting for sellers to capitulate" and drop their asking prices.

Property values as of the third quarter were down 42.9% from their peaks in October 2007, according to the Moody's/Real Commercial Property Price Indices, and Moody's Investors Service warned they could fall up to a total of 65% from their peaks before bottoming.

Despite predicting a sales increase, Real Capital Analytics has also reported that there have been "very few" closed sales of distressed assets, which include properties whose loans are in default or are being foreclosed on. It also warned that distressed assets are unlikely to be offered at the deeply discounted prices that opportunistic investors may be expecting. So far, that has been the case, as growing volumes of maturity defaults are extended and other distressed loans are restructured, keeping those assets out of the market.

Nonetheless, assets that can be classified as distressed are expected to account for the lion's share of sales activity in the years ahead. For example, the FDIC had taken over 148 banks with $515.6 billion of assets from late 2008 through mid-November, and about $65 billion of CMBS loans were in special servicing as of early December, according to Realpoint.

Overseas investors are shaping up as a force that could drive up pricing, according to Janice Stanton, senior managing director of Cushman & Wakefield's capital markets group.

She said that German investment funds in particular are focused on buying in the United States after some had waited too long to buy in the United Kingdom before commercial property pricing there rebounded. She estimated that capitalization rates in the U.K. have dropped 50 to 100 basis points since topping at averages of about 6% in the middle of the year.

Because the U.K. market timing was miscalculated, Stanton said European investors will be willing to bid aggressively to avoid repeating that mistake in the United States. "U.S. investors are pricing differently," she added. "They are saying fundamentals will continue to deteriorate."

Examples of Europeans buying here include the German investment fund manager, Deka Immobilien GmbH, which in September bought 1999 K St. NW in Washington, D.C., for $207.8 million. The price reflected a 6.3% first-year capitalization rate versus the 7% rate that U.S. investors are said to have bid for the office property.

Victor Calanog, research director for Reis Inc, seconded the sense that foreign entities could stir the investment pot here. "The story for the past few months has been about a widening of the bid/ask spread, with both parties not willing to concede. If economic conditions appear to have stabilized, and foreign competitors are sneaking into the mix, perhaps the twain may yet meet and transactions begin to move," he said.

The sense that debt financing will become more available is based on three single-borrower CMBS deals that allowed.

Developers Diversified Realty Corp., Inland Western Retail Real Estate Trust Inc. and Flagler Development Group were able to raise capital at relatively attractive coupons. In addition, a number of conduit lenders are said to be priming their lending operations, with Bridger Commercial Funding saying it was re-starting its lending operation and would bring up to $200 million of loans to market through a CMBS deal by the middle of next year.

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