Featured are: Goldie B. Wolfe Miller, Millbrook Corporate Real Estate Services; Megan Riess, Fishman Haygood Law Firm; Allison E. Beall, Pacific Building Group; Irene L. Hosford, Brown McCarroll LLP; and Elizabeth E. Solender, Solender/Hall Inc.

Although investment capital is again flowing in the commercial real estate sector and aggressively seeking products, at least in select markets, it may be a tricky year ahead for the industry. Among the concerns cited by speakers at the Urban Land Institute’s recent Real Estate Capital Markets Conference held in New York are the relative dearth of debt capital, possible refinancing difficulties ahead and the current and potential effects of the European economic crisis.

The good news is that, in the words of Stephen Furnary, chairman and CEO of Clarion Partners, the U.S. commercial real estate market is improving and improving pretty nicely. Real estate values have increased—that is a fact, noted Furnary, who predicts that the improvements in NOI, rents and occupancies will continue unless there is a double dip recession in the U.S.

Commercial property delivered solid performances in 2011 and 2012, and outperformed other major asset classes, said Jacques Gordon, global strategist with LaSalle Investment Management. Cash and liquidity are abundant—there is plenty of money. Real estate prices have held up around the world, and much capital around the globe wants to get into real estate, particularly U.S. real estate, said Gordon. Transactional volume, he also noted, is approaching a new normal.

On the other hand, speakers at ULI also expressed serious concerns over the European budget crisis. Will Greece be like Lehman? I subscribe to that view, said Gordon.

In the immediate term, the European budgetary crisis is already causing disruptions in the CMBS markets although the benchmark Treasury interest rate has fallen to record lows in the mid-1 percent range. The conduit market is sensitive to credit spreads, and when Greece hiccups, it reverberates directly to what we can quote, said Greta Guggenheim, president of Ladder Capital. Guggenheim reports that as spreads have widened in the past few weeks as a result of the turmoil in Europe, the company has seen a very dramatic fall in its fixed-rate pipeline, although the floating-rate financing volume is up.

We are in a world of turmoil, said Robert S. Blumenthal, managing director at Deutsche Bank Securities Inc. We don’t know each day when we wake up [what to expect], he said. He noted that European debt crisis has spread from Greece to Spain and Italy. Blumenthal said spreads have increased to 145 basis points from 105 basis points. Lenders could pull deals due to the situation in Europe, and Blumenthal advised borrowers to quickly lock in deals if they had reasonable offers on the table. He said he thinks the situation in Europe will deteriorate further before it improves.

Another downside risk is that the low-interest-rate environment may be inflating commercial property prices. Without a doubt, low interest rates seem to be placing keeping cap rates low, agreed John Kukral, president of Northwood Investors. We are in more of a liquidity- than a fundamentals-driven recovery, added Raphael Fishbach, principal of Mesa West Capital. Commercial real estate is once again seeing the cost of debt driving asset prices, said Scott Weiner, chief investment officer of Apollo Commercial Rea Estate Finance Inc. Super low cap rates pose a potential problem for refinancing in the out years: If interest rates are higher at that time, the property’s razor-thin income margin may not be sufficient to obtain a new loan that covers the old debt. Kukral opined that interest rates are bound to rise in the future, at the same time he does not see the NOI growth that is needed to compensate for that rise in mortgage servicing costs.

The government seems to be able to inflate the prices of all real estate except those of single-family housing, quipped Weiner. All the same, Kukral said that in five to six years, real estate prices would likely appreciate, and his company tends to see or project value increases of 6 to 8 percent in good real estate in core markets. And Robert Lieber, executive managing director of Island Capital, noted that ideally, interest rate increases would be associated with an accompanying economic recovery that would also drive up NOI. However, if stagflation rears its head, interest rates could rise without a ramp up in economic growth.

Although capital is flowing again, it remains selective, and the ability of the industry to refinance maturing loans in future years remains a question with some panelists. Lieber observed that a portfolio of some $500 billion in outstanding CMBS loans will present the need for recapitalization. And Jon Brayshaw, principal of Prime Finance, said that there is a huge imbalance in the supply and demand of debt capital. He said there is $1 trillion in total debt, half of which will be maturing in future years. Even if there were 100 groups like ours, there would not be enough capital to absorb that shortfall, he said.

On the other hand, equity may come to the rescue of a possible debt capital shortage—if certain conditions are met. Bruce Batkin, president of Terra Capital Partners, noted that capital imbalance in the recapitalization arena lies on the debt side. There is a lot of equity, much of it looking for unrealistically high returns, he said. Noble Carpenter, executive managing director, principal of Cassidy Turley, affirmed that there is sufficient equity. We just need transaction flow to get going which requires the economy to recover sufficiently and regulations to be resolved.

And Robert Ivanhoe, chair, Global Real Estate Practice of Greenberg Taurig, said that if the economy recovers sufficiently, it will be easier to meet the industry’s refinancing needs. There is enough rescue capital out there assuming lenders can take losses.

The Urban Land Institute and PricewaterhouseCoopers L.L.P. have released the results of the annual Emerging Trends in Real Estate survey — and the responses point to a stronger commercial real estate outlook for the remainder of 2012. The more than 195 participants believe that profitability, lending, and investor markets all show brighter signs and that markets are looking up for CRE firms.

The survey, which has been issued for 33 years, is jointly produced by PwC and the ULI, and it includes survey responses from more than 950 leading real estate experts, including investors, developers, property company representatives, lenders, brokers and consultants. For the mid-year survey, 195 participants who completed the original 2012 Emerging Trends survey were interviewed.

Most importantly, the survey showed a general trend toward optimism, even when compared with the year-end 2011 results. The number of respondents rating profitability forecasts for 2012 as excellent rose by approximately 2 percent, and the number rating the category as very good rose by the same amount. In fact, the only rating that fell was the abysmal-fair bucket, which dropped by approximately 10 percent.

According to the report, foreign investors and private equity will still lead the charge as active buyers of commercial real estate, but both values have declined slightly.  The biggest jump came from private local investors and public equity REITs.  According to Real Capital Analytics through the first quarter of this year, private-capital investors have completed the most deals, followed by public-equity companies.

The sources of debt capital values displayed some positive signs in the mid-year update.  Insurance companies continue to be number one overall.  However, government-sponsored entities’ value increased over 11 percent from the original survey in November 2011.  Other strong gains were found in the CMBS market, commercial banks, and mezzanine lenders all strong signs that the availability of debt is showing improvement.  According to Commercial Mortgage Alert, U.S. CMBS deals total $10.8 billion, up over 12 percent year-over-year.  In addition, RCA states that there were increases in lending as well in completed transactions.

Sentiment at ULI’s spring conference in Charlotte, N.C., in early May reflected the same results as the survey. During one of the sessions, Glenn Grimaldi, executive vice president at HSBC, cited low interest rates as a major trend that is driving the real estate industry by allowing for low acquisition cap rates. The low interest rates will also have implications on the amount of deleveraging as loans mature in the next few years, he said. Grimaldi forecasted that banks may sell more loans at discount in the next years.

Sam Zell

Straight talk on the real estate industry’s outlook from two of its eminent investors capped last week’s annual REIT conference sponsored by New York University’s Schack Institute of Real Estate. Speaking in separate one-on-one conversations, Sam Zell and William Mack offered several hundred real estate professionals and NYU students their views on leverage, consolidation and the industry’s uneven recovery.

Zell swatted away baseless optimism during a half hour of frank and sometimes salty remarks. “In terms of sales, in terms of velocity, our industry is extraordinarily constipated,” the Equity Group Investments chairman said. The pretend-and-extend strategy, he argued, has only delayed a reckoning: “When you pretend and extend and nothing happens, you’re up a creek.” Reducing the leverage that still burdens the industry in many quarters will take another three or four years, he predicted.

Trimming the industry’s debt load is a prerequisite for increasing the flow of initial public offerings. “I don’t see how you’re going to get any kind of effective public execution until the industry as a whole is a lot healthier,” Zell contended. An improving market will also speed up the pace of mergers — a topic on which Zell himself is in the spotlight. On Wednesday, Equity Residential said that it had struck a deal with Bank of America and Barclays PLC to extend the exclusive negotiation period for buying a 26.5 percent stake in Archstone, one of Equity Residential’s chief competitors. That new deadline is May 21.

Zell’s interviewer, attorney and merger specialist Robin Panovka of Wachtell, Lipton, Rosen & Katz, asked for further comment. “Archstone is an extraordinarily attractive portfolio of apartments,” Zell said. “We have been involved in a process. That’s all you’re going to get out of me.” However, some audience members noted that the previous panel on REIT consolidation and globalization was missing an announced speaker — Equity Residential president & CEO David Neithercut.

Earlier in the afternoon, AREA Property Partners founder and chairman William Mack sat down with Panovka to take the pulse of the industry. Asked about the importance of geographic and market diversification, Mack replied, “I don’t think it’s time for REITs to venture out into five different product lines in fifteen different countries.” He cited studies indicating that shares of single-focus REITs tend to trade above net asset value, while their more diversified counterparts often trade below NAV.

Mack also offered perspective on the major property categories, which he variously described as bumping along the bottom of the market or beginning to experience slow growth. Multi-family, he said, remains the “bright star” of the industry, and can look forward to a long stretch of growth: “I think multi-family probably has legs of five to seven years — if we don’t screw it up the way we usually do.” Pressed by Panovka about possible hazards of overbuilding or overpricing, Mack predicted that stricter underwriting by lenders would help keep a lid on excess.

By contrast, Mack termed the office market “spotty.” Existing inventory can fill much of today’s demand, apart from notable exceptions like San Francisco, Washington, D.C., New York City and Boston. The business side of the hotel industry is picking up, but leisure travel will take several years to come back. Retail is doing best today in major cities, mixed-use settings and those catering to niche stores. However, the retail recovery remains uneven, and some B malls are in danger of going out of business. And the industrial sector, which took a smaller hit in the recession than most other property types, has “bounced off the bottom” and is making slow progress, Mack said.

Jonathan Gray of Blackstone (left) and William Ackman of Pershing Square Asset Management speak at the Schack REIT discussion.

Where is the growth in an age of uncertainty? Some of the industry’s most influential leaders wrestled with that timely question Thursday at the annual REIT conference organized by New York University’s Schack Institute of Real Estate.

Several members of the opening panel agreed that, for the most part, REITs should stick to their knitting. “Our mainstay is high-quality retail real estate,” said Robert Taubman, chairman & CEO of Taubman Centers Inc. “We don’t know anything about the apartment business, and we don’t know anything about the office business.” But he also stressed that the answer is not necessarily cut and dried: “I do think you can morph into areas slowly, a step at a time,” he added.

Michael Kirby, chairman of Green Street Advisors Inc., looked askance at the REIT model in Europe, where most public real estate companies tend to be multi-sector. “A lot of leverage plus development activity is pretty dangerous — plus they’re unfocused,” he said. Ventas Inc. chairman & CEO Debra Cafaro also noted the contrast in the U.S. and European styles of REITs; the nuance, she added, is that “Most of the sectors do touch at the margin.” For example, she noted, senior living, a growing niche in which Ventas is a market leader, has a considerable overlap with the multi-family business.

Whether REITs should look outside the U.S. was a question that speakers brought up repeatedly during the day-long conference. Taubman cited his firm’s success in China, where his company applies U.S.-style retail programming and counts on its local partners to navigate the bureaucracy. Throughout the day, executives cited Simon Property Group Inc.’s $2 billion deal last month for a 29 percent stake in Klepierre, a Paris-based retail real estate company.  To be sure, Europe will offer plenty of other opportunities, including distressed assets, noted Michael Kirby, chairman of Green Street Advisors Inc. Nevertheless, he recommended that most REITs stick to what they know. “I hope must U.S. REITS stay out (of Europe) and leave it to Blackstone to fix, because I don’t think it’s their core competency.”

A few hours later, the chief architect of Blackstone L.P.’s real estate strategy himself weighed in during a lunchtime roundtable. The powerful hedge fund has already invested $2.3 billion in real estate assets this year, estimated Jonathan Gray, the firm’s global head of real estate. Markets that offer “a high amount of distress and limited building are interesting places to play,” he noted. Europe does indeed offer a number of places that fit the bill.  Although the European Central Bank has staved off a panic for the time being through massive infusions of capital into the financial system, Gray expects distressed properties to hit the market at a picked-up pace. One caveat: low growth will characterize Europe for some time to come, Gray said, and “it’s important that your pricing reflect that.”

Blackstone’s trademark is finding potential upside in distressed or underperforming properties, and Gray hinted that more of the same is ahead. In the past year, Blackstone had closed blockbuster deals like the $9 billion acquisition of Centro Properties Group’s U.S. retail assets, and the $1.1 billion pickup of suburban office assets from Duke Realty Corp.  “I’m not saying that investing in suburban office holdings is the same as investing in West L.A. or New York City,” Gray explained. But “at the right price, I think you can make a good investment.”

Jones Lang LaSalle Inc. sees big prospects blossoming in Lower Manhattan, and the commercial real estate services firm has just assigned managing director John Wheeler, a longtime JLL employee with nearly three decades of experience, the task of spearheading the office’s increasing penetration of the submarket.

“We see as a firm, and I see as an individual, tremendous opportunity in this marketplace,” Wheeler told Commercial Property Executive. “It was an ideal time for me to increase our market share, and there’s no better time to do this.”

The expansion of his role as managing director essentially constitutes the firm’s effort to formalize its treatment of the Lower Manhattan office brokerage operations as a distinct and self-sustaining marketplace.  As head of the office, Wheeler will utilize his cultivated knowledge of downtown and his well-honed real estate skills in everything from brokerage activities to property management, to capitalize on the area’s renaissance. Major achievements under his belt include his assistance in Wells Fargo’s disposition of more than 1.1 million square feet of commercial space and the orchestration of the New York City Housing Authority’s 20-year lease of the entire 550,000-square-foot office building at 180 Water Street.

It’s a new day in Lower Manhattan, which is the fourth-largest office market in the country, and, as Peter Riguardi, president of Jones Lang LaSalle’s New York region, noted, Wheeler is one of the few players well qualified to take the firm’s local office to a new level. And the assignment will require every ounce of Wheeler’s expertise because while the market has opportunities, he told CPE, it also has issues to overcome.

“First and foremost is the misconception of the market by people who have not been active down here,” he explained. “They’re holding onto notions and opinions of the market that no longer match the dynamic community it has become. People who may have started their careers in Lower Manhattan and long ago migrated to Midtown often still hold the notion of a place that goes dark at 6 o’clock at night. And yet with the dynamic growth of the residential communities down here, we’ve seen the neighborhood truly become a 24-hour neighborhood.”

And then, he added, is the false impression that Lower Manhattan’s office offerings are predominantly pre-war buildings that do not provide the amenities and accommodations found at new properties. “By the time 1 and 4 World Trade Center are completed, nearly 20 percent of our supply in Lower Manhattan will be space constructed post-2000,” he said. “Coincidentally, over the last 10 years, we’ve had 10 million square feet of older office buildings taken out of the office supply and converted to residential units. So the overall average age of our stock is now younger than Midtown Manhattan.”

The final piece of the educational puzzle that the Lower Manhattan office plans to put together for prospective users is enlightenment regarding what the market has to offer in the post-9/11 environment. “You can see 1 and 4 World Trade Center, you can see the PATH transit hub, you can see the Fulton transit hub,” he said. “These are all areas that actually will have the best office product and the best transit hubs in Manhattan and in the region.”

Indeed, the area has reeled in a few big fish that will surely help lure more users. Condé Nast committed to 1 million square feet at 1 WTC in 2011, and law firm Wilmer Cutler Pickering staked a claim to roughly 336,000 square feet at 7 WTC at the beginning of this year, pushing the 1.7 million-square-foot building’s lease level up to100 percent. “There’s a reason that over the last five years, over 20 percent of the leasing activity in Lower Manhattan has come from tenants migrating to Lower Manhattan and I expect that trend to increase,” Wheeler said.

Wheeler is prepping the office for what will hopefully be an onslaught of activity. “We’ve always had a presence in Lower Manhattan,” he said, “and we’ve been very successful with our blue-chip clientele, but we’re not satisfied with our market share. So as part of our strategic approach to the market we wanted more people dedicated exclusively to the Lower Manhattan marketplace.”

After a long week of seminars, presenatations and, of course, plenty of networking, the 2012 MIPIM conference in Cannes, France, drew to a close. While an atmosphere of cautious optimism pervaded, regions and countries are thinking big again. Whether it be London’s Olympic Park, the Grand Paris project, Qatar’s Downtown Doha project, Russia’s Skolkovo Innovation City, Istanbul’s Zorlu Center or Rome’s Ostia waterfront, the scale of ambition and vision is widening. Ultimately, demographics rule: The world population is growing and so is the need for innovation and renewal.

The discussions ranged the entire gamut. Howard Roth, the global real estate leader for Ernst & Young, was “cautious but positive, even in Europe, thanks to the recent stimulus,” he said. “There’s plenty of equity looking for a home this year.” Jim Fetgatter, CEO at AFIRE, was pleased with the direction the market is taking, especially in America. “The mood of investors has improved dramatically since the dark days of 2008 and 2009,” he said. “With the problems of Europe and the uncertainty of the future there, the U.S. is perceived to have a certain optimistic prognosis, however slowly the recovery unfolds.”

Even the most optimistic attendees still expressed some caution, as obvious risks remain. Distressed assets are still weighing heavily on lenders’ balance sheets, and unwinding these assets could fuel more financial turbulence for banks and the market in general. Much of the conversations were about when, if and how banks will let go of assets and debt. It was clear that BNP Paribas, hurt by the euro-zone debt crisis, was preparing for more stringent Basel III banking rules.

It was announced during MIPIM that the French bank sold a 28.7 percent stake in Klépierre SA for $2 billion to U.S. shopping mall giant Simon Property Group. David Simon, chairman & CEO of Simon and the new chairman of Klépierre’s supervisory board, said his firm has long admired Klépierre’s pan-European footprint and strong growth potential. “The investment in Klépierre represents an attractive opportunity for SPG as we seek to broaden our global footprint,” he said.

Consolidation is also continuing in services. NAI Global, the largest network of independent commercial real estate firms worldwide, with an 80-strong attendance at MIPIM this year, was recently acquired by C-III Capital Partners L.L.C. to create a leading, fully integrated commercial property services company.

“Corporate and investment clients will now benefit from an even broader range of services in more locations worldwide,” Jeffrey Finn, president & CEO of NAI Global, said. “In particular, they will have access to a corporate solutions and capital markets offering with expanded asset/property management, project/facilities management and valuation services so they can get the most value from owning, managing or disposing of their assets.”

“Improved deal volume and confidence remain centered on core deals in major markets, but confidence is growing that it will spread to smaller markets,” Chris Ludeman, president of CBRE Capital Markets, said. “A major driver is the rapidly improving debt-capital markets. The unpredictability of the U.S. presidential election — and its possible impact on fiscal, monetary and regulatory policy — remains a wild card. However, chronic fiscal and political uncertainty may be the new normal, and one to which CRE investors will need to adapt years to come.”

The moderately upbeat projection of services firm Cushman & Wakefield Inc. paints a global real estate picture that is on track to brighten by the second half of 2012, as the U.S. leads an uptick in investment sales growth and vacancy rates will decline in more than half of the world’s major office markets.

The good news will have to wait for the second half of the year, largely as the global capital markets and the real estate industry take time to bounce back from a sluggish end of 2011. “That fourth-quarter delay will definitely continue the first quarter, maybe into the first half,” the firm’s president & CEO, Glenn Rufrano, told Commercial Property Executive. Government deleveraging in many industrialized nations is generating uncertainty about both deficits and tax policy, doubts that are hampering growth in Europe, the U.S. and even Asia — the latter of still which remains the strongest region overall.

This year investment sales volume will reach $867 billion globally, a 7.5 percent increase from 2011. That growth rides mostly on the strength of a 25 percent increase in the Americas, where volume will hit an estimated $275 billion. Though the increase is significant, Rufrano noted that it is still a far cry from the $500 billion in annual volume the market recorded during its pre-recession peak.

The moderately upbeat projection of services firm Cushman & Wakefield Inc. paints a global real estate picture that is on track to brighten by the second half of 2012, as the U.S. leads an uptick in investment sales growth and vacancy rates will decline in more than half of the world’s major office markets.

The good news will have to wait for the second half of the year, largely as the global capital markets and the real estate industry take time to bounce back from a sluggish end of 2011. “That fourth-quarter delay will definitely continue the first quarter, maybe into the first half,” the firm’s president & CEO, Glenn Rufrano, told Commercial Property Executive. Government deleveraging in many industrialized nations is generating uncertainty about both deficits and tax policy, doubts that are hampering growth in Europe, the U.S. and even Asia — the latter of still which remains the strongest region overall.

This year investment sales volume will reach $867 billion globally, a 7.5 percent increase from 2011. That growth rides mostly on the strength of a 25 percent increase in the Americas, where volume will hit an estimated $275 billion. Though the increase is significant, Rufrano noted that it is still a far cry from the $500 billion in annual volume the market recorded during its pre-recession peak.