With the new year comes a flurry of predictions about the next 12 months. CPE has synthesized a variety of forecasts from around the industry to create a snapshot of the trends that will shape commercial real estate in 2012. Prospects for the industrial, multi-family and office sectors appear to be modestly upbeat; for retail and the real estate capital markets, the outlook is more guarded.

CAPITAL MARKETS/ECONOMY:  For CMBS, the good news includes fewer delinquencies and a stable outlook, according to Fitch Ratings. However, the capital markets and the economy face any number of widely discussed challenges, ranging from the European debt crisis and cautious consumer spending to worries about an economic slowdown in China.

Markets to watch: “Larger metropolitan areas will continue to outperform smaller cities, tertiary markets, manufacturing hubs, and markets with heavy exposure to the housing industry downturn,” Fitch predicts. “This continues to make the Washington, D.C./Northern Virginia, New York metro, San Francisco, and Boston markets well positioned to take advantage of the economic recovery. Conversely, Phoenix, Detroit, Atlanta, Las Vegas, most Florida cities, and certain California markets will remain weak.”

OFFICE: For the U.S. office market, slow improvement should be the story in 2012. CBRE Econometric Advisors projects that the national vacancy rate will decline from 16.2 percent in the third quarter last year to 15.7 percent by the end of this year.  “Healthy corporate balance sheets, record profitability and sustained consumer demand suggest that the economic recovery will strengthen by mid-2012 and, as a result, office market fundamentals will continue to improve slowly throughout the year,” said Arthur Jones, senior managing economist for CBRE-EA.

Markets to watch: Best bets for rent growth in 2012-13 include such as gateway cities as New York City, Boston and San Francisco, as well as high-tech centers like Austin, Dallas, Pittsburgh and Salt Lake City, says CBRE EA. Vacancy rates will drop at least 80 basis points in Atlanta, Chicago, Houston, Dallas, Houston and Seattle, according to Cushman & Wakefield; In New York City, Philadelphia and San Francisco, vacancy will improve by at least 60 basis points.

MULTI-FAMILY: CBRE EA projects that multi-family vacancy will stay steady at 5.5 percent this year, a wash with 2011. Further dips are unlikely until the job market improves. An estimated 200,000 new units will come on line during the year.

In a survey conducted by Jones Lang LaSalle Inc. in conjunction with a recent RealShare conference, 39 percent of respondents said that multi-family cap rates in the most competitive markets will stay stable. Twenty-one percent expect a decline of 50 basis points or less, and 15 percent believe that cap rates will decrease more than 50 basis points. Another 15 percent predict that rates will rise, but by less than 50 basis points.

Markets to watch: San Francisco, San Jose, Austin, Denver, Seattle and Phoenix will show the strongest rent growth over the next two years, according to CBRE EA. The Jones Lang LaSalle/RealShare survey identified the most attractive locations for multi-family investment are Los Angeles, San Francisco, Dallas, San Diego and Phoenix. Survey respondents said they are most likely to sell assets in Las Vegas, Los Angeles, Washington, D.C., Atlanta, Houston and Phoenix.

RETAIL: Despite some encouraging signs, the retail sector’s long-awaited rebound will not begin before the third quarter this year at a minimum. “Until we have some market certainty in the U.S. and overseas plus sustained high levels of consumer confidence driven by higher paychecks, a stronger stock market and an improved housing market, a robust recovery will elude the retail sector,” explained Greg Maloney, president & CEO of Jones Lang LaSalle’ retail business unit.  Of the 18 markets surveyed by the firm, only Houston promises to favor owners during the first six months of the year.  Store closings may rise to 5,000 nationwide this year, more than double the 2,200 tallied in 2011.

On the plus side, availability will continue to decline from 13.3 percent at the end of the third quarter to 12.4 percent by the end of the year and 11.7 percent next year, according to CBRE EA. Those figures still remain higher than the previous all-time high of 11.3 percent, set in the second quarter of 2002.

Markets to watch: Austin, Columbus, Denver, Nashville and New York City will all post rent growth, CBRE EA predicts.

INDUSTRIAL: Growing demand for U.S. exports is fueling expansion by end users, and bargain rental prices are prompting some tenants to look for newer, higher-quality space. Availability could drop to 12.5 percent in 2012, a decline of 120 basis points from the third quarter last year and 210 basis points since the second quarter of 2010, according to CBRE EA. Rents should increase 2.4 percent nationwide, followed by a 5.8 percent hike in 2013.

Markets to watch: Oakland, Chicago and Philadelphia should all register declining availability. Meanwhile, Riverside, Calif., Los Angeles and Chicago will post the strongest rent growth this year, CBRE EA projects.

Grandbridge Real Estate Capital has been busy originating multi-family financing and just wrapped up one of its largest such transactions this year with the closing of a $72 million Freddie Mac first-mortgage loan secured by Paradise Island, a 1,112-unit apartment property in Jacksonville, Fla.

Developed between 1990 and 1999, Paradise Island is a multi-structure rental community operating under the management of Perimeter Realty Inc. The 7-year refinance loan, provided through Freddie Mac’s Capital Markets Execution product, comes with an interest rate in the low 4 percent range and a 30-year amortization schedule that follows a two-year interest-only period. “We had a CMBS loan that was coming due so we refinanced it 90 days before,” Donald Fort, owner of Paradise Island, told Commercial Property Executive. “The rates were very attractive.”

“[The process] worked out well,” he continued. “We would definitely work with Freddie Mac again.”

The thriving multifamily sector is a magnet for investors these days and the trend is evident in Freddie Mac’s activities. The government-sponsored enterprise’s CME program has continued to thrive despite the upheaval in the CMBS markets over the summer, as Grandbridge points out in its September capital markets update. “When [Standard & Poor's] said that it could not deliver a final rating for the Goldman Sachs/Citigroup securitization in late July, the deal fell apart and investors walked away,” the report noted. “Freddie Mac was going to the market with the next CME pool at about the same time as the Goldman deal, and elected to continue the sale even after S&P pulled its preliminary rating. Freddie Mac reported that investors showed an increased interest in the CME offering and classified it as a flight to quality.”

Grandbridge has certainly been active in apartment property originations, arranging numerous transactions through Freddie Mac and Fannie Mae. Among its big-ticket deals was the closing of a $75.8 million first mortgage loan secured by the 502-unit Bank Street Commons apartment high-rise in White Plains, N.Y., through Fannie Mae.

There’s an old saying: If all the world’s economists were put end-to-end, they’d never reach a conclusion. While that’s usually the case, after the results of DLA Piper’s fifth State of the Market Survey, many of the top executives within the real estate industry – CEOs, CFOs, COOs and other senior positions – at least share the same bearish outlook.

The results of the survey, being released today at the international law firm’s 10th global real estate summit in Chicago, are somewhat unified. A full 70 percent – nearly 200 of 280 respondents – are bearish in their 12-month outlook for both the U.S. and the global financial markets. It’s not hard to see why, after we’ve weathered solvency concerns in in Europe, a gridlock in Washington, D.C., under the gloom of a budget impasse and continued low employment numbers, why many market professionals might not have the most rose-colored outlook.

Nearly 44 percent those bearish 197 respondents saw the economy’s main problem as jobs, or, more specifically, the lack of jobs. “The market is waiting and watching to see where the volatility shakes out,” one perspective stated. “This is a more difficult time in predicting the future than 2008 because it could go either way.”

And the DLA Piper survey from that same year – “by coincidence, right at the same time as the Lehman Brothers collapse,” Jay Epstien, chair of the U.S. practice for DLA, said – was even more glum, with 90 percent of respondents that year claiming the economy was heading in a bad direction. Turns out they were right, but where does the bottom lie?

“The results were a bit more pessimistic than I would have estimated,” Epstien told Commercial Property Executive. “I think they were influenced by late August and early September. If it went out in July, I think it would have been 50-50 [bearish to bullish].”

The market certainly took a negative turn towards the end of the summer, whereas previously it has been coasting towards a recovery with low interest rates and pockets of strong real estate markets, most notably in New York City and Washington, D.C. But, as those bearish respondents who cited “lack of jobs” as the main problem, employment numbers bring uncertainty into the market.

“While I don’t think one jobs report can tell the whole picture,” Epstien said, “but jobs are a major part of why we sit where we are. If we continue in a jobless recovery, that slows the ability of real estate markets to get a sense of normalcy.”

That normalcy is going to play a major role in moving forward. If the commercial real estate market is self-correcting enough and, if the 32 of 83 respondents – nearly 39 percent – who are confident in a bullish outlook are correct, we’re going to be looking at a good number of investment opportunities caused by that market correction.

But many respondents also see little action ahead, either in terms of interest-rate changes or in cap-rate fluctuation, because 74 percent and 67 percent, respectively, saw “no significant change” in those metrics.

Another significant agreement between the survey takers was on the topic of international markets. For the second survey in a row, the top three countries most attractive to foreign investment were, from positions one to three, Brazil, China and India. “Brazil coming out on top is a result of everything we’ve seen in the last 12 months,” Epstien said. “It’s hosting the World Cup [in 2014] and the Olympics [in 2016]. It’s an economy that is very strong and it’s a country that, to people in the States, appears to be very stable.”

Respondents were also aware of the fast trajectory of the CMBS market in the beginning of 2011. By the end of June, there had been more than $20 billion pumped through CMBS lenders and the sector looked to be gaining steam. “But then the market adjusted,” Epstien said. “Now, people are thinking that CMBS might not be as strong,” he said of the survey’s results: 47.5 percent of respondents think CMBS will do between $25 and $30 billion by year’s end, and 45.5 percent think the volume will reach between $30 and $40 billion.

To read more on the DLA Piper conference in Chicago, visit the Global Conference Summit website.

According to Fitch Ratings, the CMBS sector is looking good as maturing loans reach the end of their terms.

In transactions identified by the ratings agency, approximately 1,200 commercial mortgage loans totaling $17.3 billion are scheduled to mature in 2012 — a sizeable drop compared to 2,000 loans totaling $22.5 billion that matured this year. Maturities remain modest in 2013 ($13.3 billion) and 2014 ($15.5 billion) before jumping to $29 billion in 2015.

Loans scheduled to mature in 2012 have an average balance of $13.9 million and were originated between 1996 and 2007. Loans secured by office properties represent the largest concentration of maturing loans next year at 38 percent. Multifamily (22 percent), and retail (20 percent) properties follow.

Fitch continues to expect the majority of loans to payoff at maturity despite the short-term volatility of the capital markets. “Most maturing loans, particularly those from earlier vintages, benefit from stable performance and years of scheduled amortization, which make them more easily financeable in today’s market,” said Adam Fox, senior director at Fitch.

The most challenging loans to refinance are those that were originated in 2007, the peak of real estate values. “Borrowers will likely need to contribute additional equity to secure financing for five-year loans,” said Fox.

Goldman Sachs & Co. and Citigroup Global Markets Inc. announced earlier this week the cancellation of the transaction involving GS Mortgage Securities Trust 2011-GC4’s nearly $1.5 billion commercial mortgage pass-through certificates series. The transaction came to a halt when Standard & Poor’s Ratings Services notified Goldman and Citi that it would not be possible for the agency to deliver final ratings at this time.

The GC4 pool consists of 70 conventional fixed-rate loans secured by liens on a group of 130 properties that includes hotel, industrial, manufactured housing, mixed-use, multifamily, office, retail and self-storage assets across 35 states. The top three loans account for an aggregate 28 percent of the pool and are collateralized by the 1.1 million square-foot Park Place Mall in Tucson, Ariz.; the 3,052-bed Copper Beach student-housing portfolio spanning four states; and the 1.4-million-square-foot Parkdale Mall and Parkdale Crossing regional-mall property in Beaumont, Tex.

S&P’s withdrawal of preliminary ratings on GC4 and its inability to produce the final ratings occurred as the result of the initiation of an internal review of its application of conduit/fusion CMBS ratings criteria regarding debt-service coverage ratio calculations. “The review was prompted by the discovery of potentially conflicting methods of calculation ion in use,” S&P explained in a press release. “Because of the early stage of the review, the potential impact on outstanding ratings is uncertain. Until the review is completed, Standard & Poor’s will not assign new ratings to transactions that are based on the conduit/fusion criteria.”

There’s trouble in the CMBS world. “We were rolling in the spring, but there’s been some turmoil in the sovereign debt markets, which has had an echo effect throughout the capital markets around the world; CMBS has been rattled for at least a couple of months ” Dan Fasulo, managing director with Real Capital Analytics, told Commercial Property Executive. Analysts are not exactly anticipating a turnaround in the near future.

“Delinquencies and defaults remain elevated relative to levels seen prior to the recession and the market still has some issues ahead,” Ryan Severino, senior economist with REIS Inc., said to CPE. “Many loans that were five-year term loans are going to be maturing this year and next year. Watching their performance will say a lot about the health of the market. These loans were underwritten at the top of the market with aspirational expectations about the future so actual performance is likely to be disappointing.”

Courtesy Flickr Creative Commons user Deco Danny

It’s a new day for Prudential. While the company divested its commercial mortgage securitization business in 2008, a new joint venture with Perella Weinberg Partners will allow it to begin issuing CMBS, effective immediately. Calling it an “excellent opportunity,” David Twardock, president of Prudential Mortgage Capital Company, was quick to point out the chance for his company.

We can “leverage our national origination network and expand the financing options we provide for our borrowers,” he said. “Participation in the re-emerging CMBS market is critical to maintaining our leadership position in the commercial mortgage arena.”

The CMBS market is quickly heating up, making the vehicles once again attractive. According to a July 6, 2011, report by Trepp, for the first time since 2008, delinquency rates for CMBS fell for two consecutive months. The drop was likely driven by the liquidation of $1.8 billion worth of loans in June. And a further report by Commercial Mortgage Alert noted that only $2 billion of CMBS loans were delinquent by 30-59 days as of May 31, down from $2.8 billion a month earlier, signaling continued stability, or even a drop in the 60-day delinquency rate, in the near term.

David Schiff, partner at Perella Weinberg Partners and portfolio manager of the Asset Based Value strategy, was as optimistic as Twardock. He was anxious to bring “additional liquidity to borrowers and high-quality securities, secured by conservative underwriting on quality assets, to bond investors,” he said.

The Prudential Mortgage Capital Company, the commercial mortgage lending business of Prudential Financial, Inc., will use its finance expertise in conjunction with Perella Weinberg’s real estate lending and principal investing experience. Loans will be originated through Prudential’s origination platform, then warehoused and securitized by the joint venture before being serviced by Prudential Asset Resources.

Courtesy Flickr Creative Commons user chrisdlugosz

Fitch Ratings is seeing a new trend in commercial mortgage-backed securities loans in the U.S., as noted in the global rating agency’s latest newsletter. The pace and quantity of CMBS loans transferring into special servicing has started to decline.

“There is more liquidity in the market than there was last year at this time,” Mary MacNeill, managing director with Fitch, told CPE.

The closing of the first quarter is still a week away, but numbers up to this point already tell the story. As of mid-March, approximately 200 loans have transferred this year, marking a dramatic descent from the 631 loans in the first quarter of 2010. Signs of the pattern emerged last year. A total of 2,162 loans valued at $37.5 billion went into special servicing in 2009, but in 2010, the volume dropped by approximately 25 percent to 1,646 loans totaling $28.4 billion.

The sizable decline in loans moving to special servicing, however, is not expected to continue at the same rate. “We don’t think we’ll see it stay at this level,” MacNeill said. “There are still some loans that are underperforming that will be transferred.” The retail and office sectors are particularly susceptible, she noted, with many leases due to roll over next year and some leases not being renewed, especially in the office market, because some businesses just don’t need the space.

Still, improvement will continue. “This year, there are more lenders out there and it doesn’t take as long to refinance or do modifications. Not everything that goes into special servicing goes into delinquency.”

CMBS delinquencies reached an all-time high of 9.34 percent last month, but that dubious distinction may mask something of a silver lining.  Although the total delinquencies may continue to tick up for a while, they are also increasing far more slowly than they were just a few months ago, according to Trepp L.L.C. “While the rate continues to head higher, optimists can point to the fact that the rate of increase is significantly smaller than it was in the prior two months,” said Marius Clancy, managing director at Trepp, in a statement accompanying the monthly report. “Pessimists can counter that the jump comes despite the fact that new issues continue to make their way into the calculation and servicers continue to resolve troubled loans.”

As Clancy suggests, optimists and pessimists will likely draw varying conclusions from the latest figures, but last month’s 14 basis-point uptick was only about half the 27 basis-point jump from November to December and smaller yet than the 35 basis-point increase recorded a month earlier. All told, last month’s tally reflects a 63 basis-point increase in the past six months and a 285 basis-point jump in the past year.

Trepp’s report also confirms that CMBS delinquency trends continue to skew by property type.  Leading the charge upward in January was the industrial sector, where the delinquency rate rose from 8.97 percent in December to 10.12 percent last month. Also on the upswing were hospitality (15.08 percent, up 77 basis points) and multifamily (16.85 percent in January, a 37 basis-point hike. Heading in a more positive direction last month was the office sector (6.88 percent, basically a wash with December) and retail (a 14 basis-point drop on the heels of a previous 27 basis-point month-over-month upturn).

Those rates should continue to fall throughout the year as new CMBS offerings come to the market, offsetting delinquency rates among existing pools. An analysis issued this week by Cushman & Wakefield Sonnenblick Goldman points out CMBS offerings are growing steadily on both size and number as major institutional players return to the market. Familiar names dipping their toes into the pool include JPMorgan Chase, Deutsche Bank, Cantor Fitzgerald, UBS, RBS and Morgan Stanley.  “The offerings are growing in size as bankers gain confidence in the market’s ability to digest larger deals,” the report notes.

Forthcoming pools will reach $1.5 billion to $2 billion in value—only a fraction of a $7.9 billion securitization by Wachovia four years ago, but still twice as large as the biggest pool last year. Ratings agencies are also helping shape the new CMBS market by influencing players to create pools marked by diverse geographic location and product type. That runs counter to the trend in the two previous years toward the comparatively granular—and therefore more easily analyzed—loan pools that often characterized CMBS securitizations in 2009 and 2010, Cushman & Wakefield Sonnenblick Goldman observed.

Courtesy Flickr Creative Commons user smittenkittenorig

Acting as exclusive financial advisor to Fortress and Northstar, Savills plc has facilitated the sale of the pair’s $72 million mezzanine loan on the Columbia Sussex hotel portfolio. The portfolio was sold to The Blackstone Group for an undisclosed price.

The restructuring became necessary after a severe drop in RevPAR amonst the portfolio, largely due to the predominance of hotels associated through a CMBS with the now-defunct Bear Stearns. The portfolio encompasses 14 hotels, 13 of which have been rebranded from Wyndham to Starwood, Hilton, Sheraton and Marriott.

According to Savills New York CEO John Lyons, the firm plans to see more instances of unwinding capital stacks as price discovery continues and holders of multi-tranche mezzanine structures grow motivated to sell.

The portfolio was originally held by Blackstone, who sold it to Columbia Sussex in 2005.

Savills is based in the United Kingdom and was established in 1855. Today it has more than 200 offices and 19,000 employees throughout the Americas, Europe, Asia Pacific, Africa and the Middle East.