Trick or treat?

With Halloween just around the corner, it seems like a good time to check in on the spooky, scary state of the commercial real estate industry. Which of the following data points is a trick, and which is a treat?

  1. Hurricane Sandy is causing billions of dollars of damages to the East Coast; stock markets have been closed the first two days of this week.
  2. The unemployment rate, due to be updated later this week, was 7.8 percent as of September.
  3. U.S. GDP increased at an annual rate of 2.0 percent in the third quarter, according to the BEA’s advance estimate.
  4. Total returns for commercial real estate were 2.34 percent in the third quarter, according to the NCREIF Property Index, comprising income of 1.42 percent and appreciation of 0.92 percent.
  5. The NFI-ODCE, which measures core open-end real estate fund performance, clocked in at a total return before fees of 2.77 percent in the third quarter.
  6. CMBS delinquencies fell to 9.99 percent in September, according to Trepp.
  7. New CMBS issuance in the first nine months of 2012 was $24.09 billion, according to CoStar Group.
  8. Commercial real estate transactions in the third quarter were $67 billion, according to Real Capital Analytics; RCA reports cap rates are 6.2 percent for multifamily, 7.1 percent for office, 7.5 percent for industrial and 7.3 percent for retail.

Loretta Clodfelter is a contributor to Institutional Real Estate, Inc.

Going to work in Munich

The buzz around Expo Real this year was that it has become the place where Europe’s commercial real estate industry goes to work. MIPIM in Cannes, France, is still a must-attend, but more than one person told me they are finding Expo to be much more useful. You don’t come to Munich, nor travel to the trade fair center on the outskirts of town, looking for a party, although I found a couple of receptions that managed to be fun as well beneficial — and I’m sure many others among the 1,700 exhibitors and 38,000 participants did as well.

Expo is a mixture of city and regional stands promoting development, brokerage firms promoting their brokers, management firms promoting their investment abilities, and industry vendors promoting their services. The better-known organizations were mobbed from start to finish. Firms such as Union Investment and Deka, who are known to be investing capital, appeared to be the focus of all 38,000 delegates. The shared-stand receptionists should have been given combat pay. The lesser-known groups had to make their own magic. Hats off to the people — primarily young and enthusiastic — who go from stand to stand looking for interest in their region or product. “Are you interested in Russia?” This is the ultimate cold call.

The fair also provides three days of educational panels. Topics varied from country and regional investment opportunities to the hunt for financing to sector strengths (and weaknesses). It does seem, however, that every panelist has the same answer to any question about how risky that panelist’s favorite product is: “If you do (insert two or three risky behaviors), then of course there will be risk. But if you look at OUR product, we do (insert two or three benign behaviors), so there is no problem.” Like the Miss America contestants, who always have two or three pat answers memorized to cover any question, a panelist who can fill in the blanks on why his or her product isn’t as risky as all the rest will sail through the Q&A session.

The financing panels were standing-room only. But not a whole lot of new information seemed to be available. Cost of doing business is going up while volume is going down. Basel III and Solvency II are causing problems for those with equity capital, so debt investment is a good solution. The problem with debt is that you need to be careful of the underlying real estate. Very little distressed real estate is core or core-plus — it is closer to C-level than A-level.

One of the more interesting city stands was Moscow. “New Moscow” is the name of the infrastructure and development plans that will double the size of Russian capital. Driven by the need to provide better housing for the 11.5 million Muscovites, as well as reduce the crush of cars in the city center, the New Moscow area, which is an actual expansion of Moscow’s borders, will include up to 30 million square meters of residential low-rise buildings, as well as office, retail and logistics space. A high-speed train line and expanded metro system will connect the new areas with the old.

A panel on Canada was interesting, if for no other reason than no one ever talks about Canada, so comments were new and refreshing (at least to me). Canada is seeing a bump in retail development because current stock is old and not tied to transit. New development is focused on building sustainable retail.

Because the Canadian market is small, firms have long been investing cross border. Brookfield and Ontario Teachers have gone into Brazil in a big way. Canadian investors don’t worry about currency hedging because they don’t bring the capital home — they reinvest in Brazil as the investments roll.

It was notable that the panel focused on U.K. investment was not heavily attended. Are people tired of hearing about London, or was there something else going on at the same time? The panelists noted that core stock is being removed from the market as long-term private investors (think Malaysians) buy West End assets for wealth preservation and expect to hold them for 10, 15 or 20 years. The high-end residential sector is an active market, but is more for personal use than investment. International buyers purchase 90 percent of all new residential units in London. Half of that 90 percent is Asian. This is the type of buyer that is pushing prices.

London is still the hot market in the United Kingdom, but, everyone agreed, capital will eventually move outside of London simply because of the wall of money.

Sheila Hopkins is managing director – Europe at Institutional Real Estate, Inc.

Rough seas

Investors often watch transportation assets — in particular those associated with cargo shipment, such as ports and airports — for advance warning of an economic slowdown; the latest Shipping Confidence Survey by U.K.-based industry consultant Moore Stephens has people’s attention. The survey recorded its lowest figure in a year, which also happens to be its lowest level since the survey was launched in May 2008.

“It cannot really be termed a surprise,” says Moore Stephens shipping partner Richard Greiner. “In some respects, shipping has been bucking the trend for the past 12 months, exhibiting increased confidence despite the effect on the industry of the political and financial woes in Europe and elsewhere, and the problems of overtonnaging and falling rates.”

In September, FedEx Corp. reported shipments and profits were down in the first quarter, and the company cut its expectations for the remainder of the year, “citing weaker global trade flows,” reports CBS MarketWatch. FedEx rival United Parcel Service, meanwhile, missed its earnings in July and at that time also cut its profit forecast for the year.

“You don’t have to be John Kenneth Galbraith to work this one out,” says Greiner. “But while the prospects for recovery in the shipping markets depend to a large extent on a resolution of the debt crisis in Europe and elsewhere, there are issues closer to home which shipping can address, and which will both carry it over the current crisis and position it properly in the more stable market which will hopefully emerge. Quite when that will be is a question which might have defeated Galbraith himself.”

Drew Campbell is senior editor of Institutional Investing in Infrastructure.

Commercial real estate’s “front burners”

In the height of the election season, the main thing on most American’s minds, whether they are four or 84, is who will be the next president. That is a natural wonder, but, you might ask, “How is the outcome of the election in November going to affect the institutional real estate industry?”

“Real Estate Goes to Washington,” an upcoming feature in the November issue of The Institutional Real Estate Letter – North America, covers a few trends and issues that will be at the top of industry professionals minds come Nov. 5. Some of the topics discussed are the top “hot button” issues, such as the Dodd-Frank Act and Basel III; the top priorities, such as tax increases and Small Business Administration financing; as well as the “prospects for success,” which discusses who real estate professionals should be looking toward to provide aid not only during the election season but also in the future.

One of the topics that is a power player in the commercial real estate market, but which did not make it into the final article, was the untapped political potential in the industry.

A couple of interviewees mentioned that the industry and investors could benefit by rediscovering its essential character.

One interviewee said commercial real estate professionals, portfolio managers and investors should more carefully consider the benefits of at least slightly distancing themselves from reflexively anti-government financial interests and politicians, not only because it’s more ethical but because positive political engagement is a smarter business decision.

Who wouldn’t agree that more political connections, knowledge and promotion would help not only individuals but also the state of an entire industry? It would help businesses get out of the shadow of the banking and financial crisis and show not only Americans but also the world what this industry can do.

Let’s hope that the views and opinions in the upcoming article are given proper coverage in the upcoming election and that something is done to help speed up the mending process in our economy.

Denise DeChaine is special projects editor at Institutional Real Estate, Inc.

A red dawn for real estate

How do you put a price tag on all the real estate in China?

Global investors would sure like to know.

Michael Silverstein, co-founder of Boston Consulting Group’s global consumer practice, gave it an indirect shot with his new book The $10 Trillion Prize — and he threw India into the equation for good measure.

Basically, Silverstein calculated current consumer demand and projected the growth rates of both countries — the world’s two most populous nations and fastest-growing economies — to arrive at a consumer demand totaling $10 trillion by the year 2020.

No, that’s doesn’t equate to the price of real estate, at least not directly. But it doesn’t take much imagination to envision all the housing, retail, office, industrial and entertainment complexes required to satiate $10 trillion worth of Chinese and Indian consumer appetites.

As a frame of reference, the Chinese citizen born in 1960 lived on $100 per year and had a life expectancy of 47 years. The person born in China today lives on $1,400 per year, has a life expectancy of 73 years, and will spend $632,000 during their lifetime, 38 times more than their grandparents did.

They are the biggest financial opportunities in history, Silverstein says in a recent podcast interview, but the two countries have very different development models. India is still a very agrarian society, but it is matriculating tens of thousands of new graduates in engineering, technology and the hard sciences every year. Plus, India has the added advantage of being a largely English-speaking country. For that reason, Silverstein indicates that beyond 2020 it could be India that is the more formidable country.

For now, though, China is the big tuna of Asia.

“They are very consumptive,” Silverstein says of the Chinese people. “They are the most optimistic population on the planet. Eighty percent of Chinese will tell you their children will live a better life than they do; in U.S. the figure is 20 percent. The American dream is alive and well in China.”

Fortunately for investors, real estate transcends geography and culture.

Mike Consol is the editor of The Institutional Real Estate Letter – North America.

Asian investors hear London calling

In recent years, a number of Asian investors have been putting their capital to work in London real estate deals and development projects. Despite the ongoing weakness in the United Kingdom’s economy, the perceived appeal of core property and other strategic opportunities in London’s real estate market remains strong.

New investments include GIC Real Estate, the property investment arm of the Government of Singapore Investment Corp., and The UNITE Group’s recent extension and expansion of their joint venture until September 2022 to develop student accommodation assets in London, and the acquisition of Vintners Place, a class A office building in London, by a consortium of South Korean investors led by Los Angeles–based Downtown Properties.

While there remains strength in the volume of capital seeking a safe haven in the office markets of London — and other key global gateway cities — some analysts continue to question this dynamic.

According to Andrew Allen, director of global property research with Aberdeen Asset Management, the pricing of prime office assets in London does not reflect the medium-term outlook for rental prospects, and he stresses investors should be mindful of the significant historic volatility of such markets.

In essence, Allen argues that while short-term capital flows may continue to support prices in the near term, there is an enhanced risk of negative capital value adjustment, and investors should be seeking to limit their risk exposure in this market. In the office sector, Allen says, second-tier European markets have historically been far less volatile and have produced higher income returns. As such, they likely will provide for a better profile of risk-adjusted returns. Aberdeen’s research highlights the strengths of second-tier office markets in the Nordics, Germany and France, in particular.

Jennifer Molloy is editor of The Institutional Real Estate Letter – Asia Pacific.

Land purchases are up, but the economy is down?

Real estate developers the world over are known to be overly optimistic at the top of cycles and downbeat pessimistic at the bottom, when the economy starts showing signs of new growth.

I have noticed very similar pattern while reading recent news and research reports from China. You see, the Chinese economy has been growing at a double-digit rate for almost 20 years, and now is the first time growth has started slowing down. In the West, we had numerous economic cycles and have ballpark numbers for what is slow growth and where the bottom may emerge. In China this is not the case. In most recent history of the “free market” economy there, there has not been a single recessionary period. So no one, including “pundits,” knows what to expect, i.e., how slow the growth in China can get and how long this slow growth period will continue.

That is why I have found it somewhat perplexing reading reports about developers in China, particularly in Beijing and Guangzhou, stepping up their land acquisition activities, outbidding each other and paying over the asking price. Data in China is not always reliable, but there were several reports of this nature over several weeks, and I have started wondering if those developers know something that the rest of us don’t. Or are they exhibiting behavior typical to developers all over the world?

The PMI in September inched up to 47.9 from 47.6, but it remains under the 50 percent threshold that divides expansion from contraction. The economy, as a whole, grew only 7.6 percent in the second quarter, the slowest clip in more than three years after the most recent global financial crisis. The two recent cuts of the benchmark rates have not produced tangible results yet, and the most optimistic projections put the annual growth at 7.5 percent, still a very respectable growth rate. The question that no one seems to have an answer for is whether the slowdown will continue unabated or we are approaching a bottom. If the latter, is the “doubling down” that many Chinese developers appear to be engaged in justifiable?

If my assumptions about developers in China are correct — that they are similar to their brethren in other countries — then we are far from the bottom and the Chinese economy will continue to slow down for some time. However, if for some inexplicable reason, they are different, then indeed we may soon see better figures in economic reports from China, pointing to resumed expansion of the economy there.

Alex Eidlin is managing director – Asia Pacific with Institutional Real Estate, Inc.

Construction spending declines, but single-family construction improves

The housing sector is rebounding, despite total construction spending falling by 0.6 percent to an estimated seasonally adjusted annual rate of $837.1 billion in August. Spending on single-family homes rose 0.9 percent, to an estimated seasonally adjusted annual rate $273.5 billion, nearly 18 percent above the level from a year ago. Construction of single-family homes rose in August to the fastest annual rate in more than two years and marking the fifth consecutive month of growth.

Confidence among builders rose in September 2012 to the highest level in more than six years, according to a survey by the National Association of Home Builders (NAHB). The demand for rental properties will help drive the initial phase of the housing market recovery. Homebuilders are driven by developers and investors who are seeking to rent out these properties. According to Trulia, the online real estate listing site, and other sources, it is now more expensive to rent than to buy. But the demand for rental properties ensures rents are not likely to decrease.

A growing number of institutional firms are eying this demand and accumulating single-family properties. The Blackstone Group spent approximately $250 million this year buying foreclosed single-family houses. Blackstone has teamed up with principals of Treehouse Group, based in Tempe, Ariz., and Dallas-based Riverstone Residential Group to buy and fix up the homes, find tenants and maintain the rental properties. In addition, Sylvan Road Capital, which was launched by Oliver Chang, the former head of U.S. housing strategy at Morgan Stanley, focuses on buying and extensively renovating highly distressed single-family properties. Other firms pursing a single-family residential strategy are Apollo, Colony Capital, GTIS Partners, Oaktree Capital Group, Pacifica Cos., Starwood Capital Group and TPG Capital. Also, two single-family REITs were formed this year: Beazer Pre-Owned Rental Homes, led by affiliates of Kohlberg Kravis Roberts & Co., and Silver Bay Realty Trust Corp., formed by Two Harbors Investment Corp. and investment manager Provident Real Estate Advisors.

Though new homes represent less than 20 percent of the housing sales market, new residential projects and owners have a huge impact on the economy. Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue.

Andrea Waitrovich is web content editor of Institutional Real Estate, Inc.