It’s a Wait and See Game for Buyers, Sellers

The glory days of staggeringly high-priced commercial real estate transactions that ended about a year ago are over for the foreseeable future, as U.S. and international investors battle the credit crunch and, according to the latest CBRE Global In-Sight report, hold tight for the gap between asking prices and offers to shrink. But all is not lost during the waiting game; rising rental rates over the last few years continue to produce higher net operating income as tenants come and go.Sellers are still hoping to turn those exceptionally high profits they became accustomed to in the last couple of years before the lending crisis, but buyers are frequently refraining from shelling out the big bucks for premium properties. “Sellers and buyers are all trying to discover what the right price is; no one wants to sell too low and no one wants to buy too high,” Raymond Torto, CBRE global chief economist, told CPN today. Torto and colleague Nick Axford, head of EMEA research and consulting, produced the report. “Everyone knows someone who made a mistake in the last year, so price discovery is what’s going on at the moment.”For the immediate future, a return to the seemingly endless period of countless mega-transactions is not in the cards. However, the diversification that comes with real estate investment is still highly coveted. For institutional investors, the question is not should I get back into real estate, it’s when do I get back into real estate,” Torto said. “That’s not to say that we’ll go back to the volume of transactions in 2007, because debt was an important part of that. Investors are looking for some debt, and the other thing is they want debt that is non-recourse. It helps liquidity in the marketplace if there’s debt, and that’s going to take a little while to come back.” As for property prices, the market will still take a few steps back, but not too far back. “I was recently at a meeting with some top institutional players, and the feeling was, you think of 2007 and 2006 as froth, and then go back to 2005; what we’re going to adjust to is 2005 prices,” Torto noted. “That’s about a 10 to 15 percent reduction from the peak in 2007.”In the meantime, property owners will continue to keep their heads above water as they reap profits through lease turnovers in a market that has seen rental prices soar over the last several quarters. And with occupier markets being healthier than in previous downturns, borrowers are more likely than not to maintain interest payments.