A new report on global commercial property sales $10 million and above shows that quarterly transaction volume has surged for the first time in two years, a clear indication that the market is recovering from a deep recession.
In the fourth quarter of 2009, volume rose to $147 billion, up 85% from the same period of 2008, according to New York-based research firm Real Capital Analytics (RCA). It was the first quarterly increase on a year-over-year basis in seven quarters, according to the report.
From apartments and offices to retail deals, all property types except hotels showed an increase. Office, retail and industrial transactions together registered a 29% gain in the fourth quarter from the same period a year earlier.
Asia led the fourth-quarter surge, with China, Hong Kong and Taiwan providing most of the momentum, while the U.S. and Canada experienced a decline in sales.
“The U.S. is lagging counterpart regions in Europe and Asia. But we fell into the down cycle arguably later as well,” says Dan Fasulo, managing director of RCA. “We like to think that the U.S. will start to recover rapidly over the next six months, basically following in the same path of the recovery we’ve seen in Western Europe and in Asia.”
In the Asia Pacific region, volume rose 240% year-over-year in the fourth quarter, with China showing the strongest gains. And for all of 2009, only China registered a significant increase in sales, with volume rising 139% to $156 billion.
Although European and U.S. governments initiated stimulus programs, they were outdone by China, says Fasulo. “When Beijing told the banks to lend, they went out and lent the money. A lot of that excess debt capital went toward the acquisition of real estate, mainly large development sites.” A number of mixed-use projects were initiated at those sites and projects are under way.
Values begin to rise
The strengthening sales show that the market has bottomed out and begun its recovery, says Fasulo. “I think it’s very easy to say that as far as transaction activity goes, we’re well off the bottom, which as we look back, probably occurred in the first half of 2009.”
Anecdotal and some statistical evidence show that values have also begun to rise, says Fasulo. “In early 2009, you could barely get a quote to buy an office building in Manhattan. And if you did get a quote from a lender, you would be at extraordinarily low loan-to-values and a high interest rate. Now there’s more than a dozen lenders that would give you an honest quote today, at pricing that’s much more attractive.”
In one example signaling an improved market, the iconic, 160-unit Helmsley Carlton House hotel on Madison Avenue in Manhattan drew a flurry of offers after it was put up for auction in January. “There were over 35 bidders — over 100 interested parties and 35 firm bids,” says Fasulo. “Those are greater numbers than we saw at the height of the market.”
Bidding war in Boston
Another sign of an improving commercial property market is the bidding war that erupted over One Brigham Circle, a 200,000 sq. ft. office complex in Boston. Less than a week ago, AEW Real Estate Investment Management, based in Boston, won the competition with a bid reported at nearly $99 million.
Although the fourth quarter saw a dramatic increase in sales activity, transactions for the entire year of 2009 reflected the severe losses of the economic downturn. The global volume of commercial property sales dropped 30% to $381 billion, while the number of transactions fell 40%, RCA reports.
“We got pushed to the brink in late ‘08 and early ‘09, and saw almost the disappearance of the debt capital markets for commercial property,” explains Fasulo. But little by little, the marketplace has improved and property values are in the initial phases of climbing back from the abyss.
Still, not all properties are rising in value and desirability at the same pace. Class-A properties in highly desirable markets will recover their values more quickly, says Fasulo, particularly those with long-term leases in place and strong tenants.
“It’s almost a two-tiered market that’s developing. One is the prime assets that have more bond-like qualities, and the other part is assets that have near-term exposure to the economy — retail centers that have lost major tenants, broken development projects, raw land, a secondary market hotel. Those are the types of assets that are not going to see values recover anytime soon.”
A Class-A office building that stands mostly empty also is unlikely to share in the rebounding market, says Fasulo. But a building net-leased to a major institution such as a pension fund is a different story. “You’d better believe we’re going to see values increase for that type of product this year.”
As for the timing of recovery, Fasulo says he may be more bullish than many analysts. “I would argue that it’s already happening now.”