Plentiful but Fleeting Investment Opportunities Await, JLL Study Says

The commercial real estate investment outlook for 2009 looks grim at best, but there is more to that picture than meets the eye, contends a just-published capital markets report from Jones Lang LaSalle Inc. Smart players who can bring plenty of cash to the table will be poised to reap a once-in-a-generation bonanza. In the years to come, the report states, this year may “be most remembered for presenting some of the most attractive investment opportunities in living memory for astute investors who are very focused on quality assets in the market and armed with large amounts of equity at their disposal.” However, timing will be of the essence. Investors will need to be not just savvy but also nimble, since the window will stay open only briefly: “Once the yield ceiling is set, the crowd will inevitably follow.” Those opportunities will emerge from conditions that will remain rocky at best throughout the year. On the heels of last year’s 71 percent drop in transaction volume, sales might fall another 30 to 40 percent in 2009. On a more positive note, Jones Lang LaSalle contends that the bottom appears to be in sight. Perhaps the greatest influence on timing will be how quickly the expected flood of forced sales begins. On that score, the big variable is how soon–and how willingly–large numbers of buyers and sellers will find the middle ground. “Although potential sellers are anecdotally beginning to accept the severe nature of the re-pricing that is occurring,” the report notes, “there remains little evidence to suggest that an urgency to dispose of assets will materialize in the first three quarters of the year.” As for prospective buyers, even deep-pocketed investors will be wary of deals as long as real estate market fundamentals continue to slide. That said, markdowns have already begun and will keep gathering steam throughout the year. Although a relatively small volume of trades makes it difficult to pin down trends, the forecast suggests that a 20 percent to 25 percent decline in values has hit most property sectors and geographic areas. “Plenty of anecdotal evidence points to cap rates that have increased by a minimum of 200 basis points,” the report states. Cap rate increases have been much higher in secondary and tertiary markets and for lower-quality assets, the study pointed out. In this climate, both institutional owners and open-ended funds will concede that their assets have lost significant value. Also shaping the volume of distressed assets will be the enormous volume of hard-to-refinance CMBS mortgages coming due. Through 2012, loans valued at $300 billion are expected to mature annually. An increasing level of forced sales will set long-awaited price benchmarks that will finally start to open the market. Meanwhile, debt will be tough to come by, despite the federal injection of capital into commercial banks. The Jones Lang LaSalle study cites a Federal Reserve Bank survey indicating that 87 percent of banks were tightening lending standards during the fourth quarter of 2008.