Grubb & Ellis 2011 Forecast: Slow Clearing

A steady, though often grindingly slow, recovery, improved access to capital and vexing valuation challenges await in 2011, according to Grubb & Ellis Co.'s industry forecast.

November 18, 2010
By Paul Rosta, Senior Editor

Bob Bach

A steady—though often grindingly slow—recovery, improved access to capital and vexing valuation challenges await in 2011, according to Grubb & Ellis Co.’s industry forecast.

No double-dip recession is ahead, contended Bob Bach, the firm’s chief economist, during a briefing this morning at the company’s office in Midtown Manhattan. He expects the job market to continue its modest recovery, adding roughly 125,000 jobs per month next year, followed by an addition of 150,000 jobs monthly in 2012. Excessive debt growth and a long-term economic malaise of the kind that enveloped Japan for years are the biggest concerns for the U.S., he added.

Bach ranked the multifamily, industrial, retail and office markets in order of expected strength. Topping the list is the rental residential market, which will benefit by a slide in homeownership and the growth in the 18-to-34 age group, which tends to be largely made up of renters. Global trade growth is an ace in the hole for the industrial sector, which Bach gives second place; a trade war that would disrupt the flow of goods is the largest hazard.

The pleasant surprise is retail; as Bach said, “It’s done much better than we thought it might have done.” In that sector, pent-up demand and promotional pricing may face challenges from consumers’ cautiousness regarding debt. Office brings up the rear in Bach’s projections, but there is a silver lining of sorts there, too. “Class A asking rents have bottomed out, and we expect they’ll be firming up very, very slowly over the next two years.” Bach projected basically no change for office asking rents nationwide in 2011, and a 0.4 percent uptick in 2012.

New York regional executive vice president & managing director Joseph Swingle complemented the national overview with a snapshot of Manhattan, the nation’s largest office market. On the investment side, seven of the 10 largest office trades involved partial-interest sales, underscoring the prominence of recapitalization. Pricing and occupancy are inching up, as average asking rents are up from $50 per square foot a year ago to $52 today and availability has ticked down from 15 percent to 14 percent. Those figures include some other intriguing trends; for example, pricing has been basically flat, with the notable exception of the dozen or so office buildings that command $100 per square foot; rents for those properties are up 3 percent year over year, while other categories are basically flat. Broadly speaking, age seems to be a factor; only 30 percent of Manhattan’s office stock was built after 1970, but vacancy in those properties is far lower than the aggregate—4 percent.

The capital markets appear to be poised for an even sharper change than the real estate industry as a whole. Life insurance companies have emerged this year as the third largest lenders, behind Fannie Mae and Freddie Mac and banks, noted Jeffrey Majewski, executive managing director & leader of Grubb & Ellis’ debt and equity finance practice, citing research by Real Capital Analytics Inc. Those lenders are focusing at debt-service coverage rather than at loan to value, which tended to shape lending decisions in 2005. Meanwhile, CMBS originations will probably triple or even quadruple from this year’s totals, which are in the $10 billion range.

Better access to capital is a promising trend for all real estate services, but accurate evaluations of assets will often be elusive, predicted Ed Alegre, executive managing director Grubb & Ellis Landauer Valuation Services. A dearth of deals to draw on in most markets makes it more difficult to determine value. Further complicating the valuation process, pretend-and-extend will continue through 2011 and the Federal Reserve Bank will not press banks to mark their assets to market. Underwriting will remain conservative, as lenders focus on in-place income. Looming over the market is the coming $1.4 trillion in of loan maturities from 2011 through 2014. “We are concerned about how the market will fill the gap between refinancing and debt and equity,” Alegre explained.