News
FORECAST FEVER
November 7, 2008
| We're tempted to stay in our semi-optimistic New York bubble, but we thought we'd better find out what's going on in the rest of the U.S. That's why we have the Urban Land Institute and Pricewaterhouse Coopers, which gave us a national reality check via their annual report presented yesterday at the Roosevelt. Over 700 real estate professionals put their two cents into predictions for '09: a lottrending downwards, but some glimmers of hope. |
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| Esteemed speakers: Citadel Realty Advisor's Joel Ross, PWC U.S. real estate leader Tim Conlon, Apollo Global Management's Joseph Azrack, Barclays Capital U.S. head of real estate investment bankingSchecky Schechner, Bank of America global head of commercial real estate Mark Patterson, Cornerstone Real Estate Advisors CEODavid Reilly, PWC director of research Susan Smith, and ULI senior resident fellow Steve Blank. |
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| We're in our worst commercial real estate period since the early 1990s, Steve said, seeing a dramatic drop in values, increases indelinquencies and foreclosures, lenders without money, andreduced tenant demand, thanks to a "minefield of issues" from thecredit crisis to rising unemployment and stock volatility. Trophywill have less erosion in the downturn, while Class B and C face more risk. Total returns in '09 will be negative, while cap ratesshould increase across the board. There's a financing gap that needs to be filled, and equity will not fill it all. Please, the good news? Next year should be a good one to buy; cash-heavy-low-leverage buyers will come out on top; there's a lack of oversupply in many markets; and CMBS will slowly be revived. Hopefully Steve got some rest after his presentation; he's off to London on Tuesday to give it again—and then Asia. |
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| Major pathway cities are making out like bandits, thanks to a flight toquality and 24/7 markets, according to Susan. Although the forecast's city ratings have gone down since last year, most coastal markets are expected to ride out the storm, including Seattle, San Francisco, Los Angeles, Washington, D.C., New York and Boston. Very few Sun Belt and Midwest cities are strong, except Houston,Austin and Chicago. Expect struggles in San Diego, OrangeCounty, New Orleans, Phoenix, Las Vegas, Atlanta, most ofFlorida and smaller metros like Charlotte. On the property side, moderately-priced apartments, warehouses, CBD offices and high-income apartments are poised to do well, while regional malls and limited-service hotels are expected to do worst. She suggests investors buy or hold apartment buildings and industrial; buyresidential building lots and distressed condos; hold hotels andoffice; and pray for retail. Overall, she predicts that 2009 will be adowner, 2010 will flounder and 2011 will see recovery underway. |
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| Then, the panel of investment experts. Schecky said life firms are using a 7.5-8% cap rate, but that it wasn't long ago we saw 9% rates and perhaps we're just returning to historic levels. And while CMBSis not the next subprime, we should come up with ideas on how toregulate the industry and relay that to Washington. Dan Abrams, EVP of iStar Financial, said he believes real estate still has inherent value; yet many investors will be sitting on the sidelines, and he doesn't know how long that money can sit. |
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| Mark predicted it will be a long time before we get back to the normal debt market of 5-6 years ago, saying the outlook is grim in the near future; even though Latin America and Asia have been doing much better than the US and Europe, clouds will be heading their way soon. NYC, overall, will fare better than the U.S. Even though this is atough period for the city with increasing lay-offs, more sublease space and a predicted vacancy rate of up to 12%, it is one of the best markets to be in and will rebound. Foreign interest, in particular, will always exist, David said. |
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| Even with the slightly depressing forecast, some of the attendees report that deals are getting done, like AKRF's Peter Liebowitz, right, with Center Partners' Glen Vetromile, Meridian Development'sHoward Weitzman and Weitzman Group's Randee Weitzman, who's been quite busy moving his firm's big (and undisclosed) projectsforward. |
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| No predictions were made on the popularity of parking garages, but Becker Brothers' Scott Sherman (second to right, with Wells Fargo'sMike Chi, Ignacio Diego and NYU Stern's Matthew Grabler) said his company has been actively investing in them. With the exorbitant prices of many of today's Manhattan spots, no wonder investors want to park their money there. |
