NAI Outlook: Global Commercial Real Estate Holds Strong

The global commercial real estate market is on a roll, while the U.S. holds with bated breath and New York City takes a pause, noted experts at NAI Global’s Global Market Outlook 2008, held this morning at the New York Athletic Club in Manhattan. Jeffrey Finn, president & CEO of NAI Global (pictured), began the presentation, noting the unusual dichotomy the market is experiencing with solid fundamentals, high construction and land costs, and the credit market’s impacting the financial markets and trading. Although cap rates have increased 50 basis points across in all categories, the strong fundamentals should continue throughout 2008. European properties are strong across the board, while Asia Pacific offers new opportunities as neighboring countries benefit from the burgeoning growth in India and China. Latin America is also in a period of strong economic growth, while in Canada, foreign investors have broken the Canadian hold on prime investment properties. The U.S., on the other hand, will be in a “wait and see” mode in 2008, Finn noted. In New York City, Andrew Simon, senior managing director of NAI Global’s New York City office, noted that he has heard talk of “doom and gloom” affecting the city market, but pointed out that it is seeing numbers unheard of in the past 25 years. Large blocks of space are becoming increasingly difficult to find, while the recent annual rental rate growth of 15 percent may begin to flatten out. “It’s hard pressed to continue its growth,” he said, “but supply and demand may give it another push.” And with the credit markets, it is more difficult to get larger deals done in Manhattan, although smaller deals are still moving. “However, the value of the dollar is making it more affordable for international investors,” Simon noted, pointing out additional interest from pension funds and REITs. “New York is healthy, but there may be a bit of a pause,” he concluded. “Whether it’s a year or two, it’s a temporary glitch.” And how did the commercial real estate market get to this point? Dr. Peter Linneman, NAI Global’s chief economist & principal of Linneman Associates, said that there was “a confluence of more money than brains,” noting that between 2005 and the first half of 2007, “everybody shortcut due diligence–some ridiculously, some at the margin.” Long-term assets and long-term liabilities were also mismatched, and when the market entered a period where asset values fell, an owner received a margin call and sold the asset. “It just rippled,” he said. Additionally “there was a fundamental battle between fear and greed … and greed won again,” Linneman said, warning that the market should be prepared for greed to win again, as it will come sooner than the market thinks. And lastly, he noted, is that people tend to forget that the Fed is made up of nine human beings who make mistakes that affects the price of risk-free money around the world “until they change their minds.” As a result, many investors are not as rich as they thought they were, and capital went on strike. But he noted that no one can make money on both sides of the deal if a strike continues. And will the market ever get back to the first half of 2007? “Not for a long time,” he said, noting, however, that the market will work through it. “If you don’t have to refinance or sell, don’t,” he said. And do not count on a recession either, he continued, noting that his data shows that 40 percent of the overall economy is up, 40 percent of the market is down and 20 percent is flat. “In a really great economy, you’ll have 45 percent up, 35 percent down and 20 percent flat.”