Despite Low Confidence, CRE Investors Plan Portfolio Increases

Although there is no end in sight to the economy’s downward spiral, many commercial real estate investors think this year will be a good time to do some shopping. Of the 1,129 private and institutional real estate investors queried in a Marcus & Millichap Real Estate Investment Services survey, 51 percent plan to increase the size of their portfolios in 2009. While the figure plummeted from last year, when 62 percent expected to make acquisitions, it is still an indication that the industry is not sounding the alarm just yet. Right now, the same challenges remain. Sixty-one percent of the investors expect the economy to worsen or hold steady in its discouraging position over the next 12 months, and 74 percent believe financing will be equally, if not more difficult to obtain–yet they are undaunted. “Investors are not expecting a whole lot of improvement in credit markets, but the thinking seems to be that with pricing adjustments in 2009, there will be more buying opportunities,” Hessam Nadji (pictured), Marcus & Millichap managing director of research services, told CPN. “And financing, even though it’s tight, is still available.” Most of those planning to snap up properties this year, however, probably won’t start writing checks right away; only 22 percent believe the time is right for purchasing. “For the investment market to move again, 48 percent said sellers have to become more reasonable,” Nadji noted. “Additionally, buyers have to realize it’s not a fire sale environment, but most believe it is on the sellers to adjust pricing.” Sixty-seven percent foresee price corrections of at least 10 percent. If certain responses of survey participants are any indication–a mere 11 percent plan to whittle down their portfolios–commercial real estate will probably avoid sinking to the depths experienced in previous severe market slumps. “We don’t sense panic in the market,” Nadji said. “First, we didn’t overbuild like we did in previous cycles, and second, we’re going back to having a spread in cap rates by quality. There was the notion that Class A properties in primary markets will have the same pressure as lower-quality products in tertiary markets, but now cap rates in tertiary markets are rising much faster than in primary markets.” But commercial real estate is hardly out of the woods yet. “We are definitely going to see foreclosures and troubled assets, and that’s building up pretty rapidly, but there is a different set of circumstances than in the last major real estate downturn in the early 1990s.”