2011–2012 Commercial Real Estate Forecast

 2011–2012
Commercial Real Estate
Forecast:
By
Ray Alcorn
April 2011
Copyright © 2011 by H. Ray Alcorn, Jr.—All Rights Reserved Published by Golden Key Investments Ltd., Blacksburg, Virginia No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without the prior written permission of the Publisher. Requests to the Publisher for permissions should be addressed to Golden Key Investments Ltd., P.O. Box 5, Blacksburg, VA 24060, tel. 540‐552‐5533. Limit of Liability/Disclaimer of Warranty: The publisher and author have used their best efforts in preparing this text, but they make no representations or warranties with respect to the accuracy or completeness of the contents and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or other commercial damages, including but not limited to special, incidental, consequential, or other damages. For additional information about the author, reference materials and products, please visit our website at DealMakersguide.com For questions or inquiries about obtaining permission to distribute this material, please send an email to [email protected] 2
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2011–2012 Commercial Real Estate Forecast By Ray Alcorn
Table of Contents
Page #
Part 1: The Big Picture
GDP Forecast: The DC factor & the Housing Drag
5
Employment & Income Forecast
8
Capital Markets: Conditions and Outlook
12
Interest Rates: Trends and Forecast
18
Commercial Real Estate Performance:
Conditions and Outlook
22
Part 2: Forecast by Region and Property Type
The Turning Point: The Cycle of Recovery
Current Conditions and Outlook:
• Retail
• Office
• Multi-family
Resources
26
31
37
3
4
2011–2012 Commercial Real Estate Forecast
Part 1: The Big Picture
GDP Forecast: The DC factor & the Housing Drag
Employment & Income Forecast
Commercial Real Estate: Conditions and Outlook
Capital Markets: Conditions and Outlook
Interest Rates: Trends and Forecast
I’ll begin this year’s forecast begins with a quote from last year’s introduction:
The best part about forecasting the future is that there is always more of it.
You can start at any given point in time, knowing that next quarter or next
year you’ll have more data and know what you missed and what you got
right. In my view, the value of the exercise is not the score, but in learning
why you were right or wrong in your predictions.
–DealMaker’s Guide: 2010 Commercial Real Estate Forecast; p. 5
I use that quote because the trends that affect real estate are large and slowmoving, set in motion by over-arching demographic and economic factors. Much of
the data can be extended five to ten years, and continue to be the determining
factors that shape the investment environment over the coming years. We will refer
more than once to data and charts from last year and bring them up to date with
additional information.
It is for this reason that this year’s forecast is a two-year outlook. Real estate
markets—particularly commercial real estate—are like large, slow-turning ships. Like
the economy itself, the market is so large and geographically non-integrated that it
takes a massive event (e.g. the financial meltdown of 2008) to produce a sharp turn
in the short term. The real question is how long a trend takes to play out. Therefore
we use historical data as a reference point, and input current data to confirm the
general direction and refine the time-line.
In my experience three years is about the limit of a useful forecast. Beyond that the
many variables and margin of error increases to a point that renders the data
meaningless. But in this case 2012 is a Presidential election year, which can produce
major changes in the economic outlook, amplified by hyper-partisan politics.
Regardless of your political preferences it is prudent to keep a close eye on the
shifting tides of political discourse and results, so I’ll hedge my bets and save the
2013 forecast for when the outcome is known.
For a reference point we will take a look at the economic statistics for 2010, and then
discuss the most likely expectation for conditions over the next 12–24 months.
Macro Economic Conditions and Forecasts
In sum, 2010 was an improvement over 2009, though in many places it probably
didn’t feel that way. GDP growth of 2.9% was about a half-percentage point better
than expected, but the difference was not enough to excite anyone. In normal times
a 2.9% growth rate would be considered anemic. Moreover, 2010 upside
performance was largely due to the cycle of inventory rebuilding, which is over.
Many forecasts for 2011 GDP growth started the year above 3.5%, but in the last
month have been downgraded to the 2.5% range. The chart in Exhibit 1 reflects the
up and down path of historical and forecast economic growth.
5
Exhibit 1
U.S. Real GDP Growth Rate Forecast Trend
Past Trend and Future Projection
Source: www.Forecasts.org
Those who read last year’s forecast will recognize the familiar “W” shape of the
forecast GDP, which in this chart turns negative in Q2 2012. A year ago the same
forecast predicted negative GDP in Q2 2011.
The DC Factor
What changed the outlook was the intangible effect of the December decision to
extend reduced tax rates for two years. Every forecasting service I follow took an
upward jump the month after the tax bill was enacted by Congress. As can be seen,
the boost will be short-lived. Expect uncertainty to return in 2012 unless Congress
takes the unlikely course of dealing with the issue before they absolutely must.
I call this the “DC factor”. Any attempt to forecast future economic trends is
impossible to quantify with an acceptable degree of accuracy without considering the
possible scenarios for political action, particularly in the tax code.
In that respect, the extension of tax rates in December now means that over 130
provisions of the tax code are temporary and subject to change on an annual or
semi-annual basis. Add to this the unknown costs and effects of the two massive
legislative measures of 2010: the health bill and the financial reform bill. Together
these two bills create 139 new commissions, agencies and authorities whose task is
to develop the regulations to enact the bills. That’s right; we don’t even know the
rules yet, much less how to plan for them.
This is uncertainty on a huge scale. It affects the decision-making of everyone in the
economic food chain, from consumer sentiment to overseas manufacturers. An old
axiom of human behavior is that a confused mind says, “No”. Therefore when the
uncertainty element of the DC factor is inserted into forecasts it significantly affects
the potential for positive growth.
6
The Housing Drag
So much has been written about the housing market that there is no need to rehash
old issues here. This year’s news is last year’s news: the drag on growth from the
housing market continues, and will do so for several years. It is instructive to take a
look at the numbers to put the problem into perspective.
Total excess housing inventories are estimated at 2.0 to 2.5 million. (Note: estimates
vary widely, from 1.5 million to 3.5 million. I’ve used the mid-range estimate). New
housing completions and manufactured housing shipments are running about
700,000 annually. Deduct demolitions and conversions of about 300,000 per year,
and the annual net supply increase is about 400,000.
According to the 2010 census, new household (HH) formation has slowed to
approximately 800,000–900,000 per year, down from the average for the decade of
1.1 million annually. This is due to lower immigration, high unemployment forcing
combined households, and falling prices in the housing market.
The math is ugly. High-range annual demand of 900,000 and net new supply of
400,000 per year reduces excess inventory by about 500,000 per year. Using the
low-range estimate of 2.0 million excess supply it will take four to five years to get
back to equilibrium. This is the reasoning behind forecasts of another 10%–20%
drop in housing values.
Further affecting the supply/demand math is the effect of foreclosures. Raw 2010
census data (subject to revision) estimates the vacancy rate for existing housing
units has climbed to 11.4% from 9.2% in 2000. That doesn’t sound so awfully bad
unless you look at the actual numbers: 14,988,438 vacant housing units as of 2010,
up from 10,777,553 in 2000, a 39.1% increase. Over the decade population grew
10.2%. Perspective is everything in evaluating statistics.
The low production numbers for new housing affects employment. Of the estimated
8.8 million jobs lost during the recession (January 2008–Feb. 2010), over 2 million
(23%) of the losses were in the construction industry. Current new home production
levels mean most of those jobs are gone for good.
Exogenous Events
No forecast is credible without acknowledging two macro factors that always loom
large: geopolitical unrest and oil prices. The situation in the Middle East is explosive
and still developing. Oil has risen 20% in the last two months. High fuel prices act as
a direct drag on growth, essentially a tax on users at every level of the economy. $4
per gallon gas takes a hard toll on travel, production and transport costs.
Employment and Income
The old real estate axiom of “location, location, location” is irrelevant in a recession
and the recovery period. The mantra becomes “jobs, jobs, jobs”. It does not matter
if you have the best corner in town if the market has double digit unemployment and
losing population. All real estate sectors depend on employment for growth. The
early recovery period is often difficult to track, as hiring tends to be uneven
geographically and by job sector.
Unemployment peaked at just over 10% in 2009, and 2010 ended slightly better at
9.6%. There is great debate about the validity of the data due to modeling errors,
7
and the numbers can be sliced, diced and interpreted in numerous ways. However,
for our purposes it is sufficient to divine the broad trends in employment, specifically
where and how jobs are being created. Recent data (March 2011) indicates a drop in
the unemployment rate to 8.9% which would seem to indicate a recovery is finally
underway, but employment is a lagging statistic. As we will see the situation is not
as clear-cut as the headline numbers imply.
Exhibit 2
Unemployment: January 2000–March 2011
A leading indicator for sustained employment gains is the rate of wage growth. As
wages increase employers will begin to hire, but only when they see the demand as
sustainable. As seen below, 2010 saw barely detectable increases and the lack of
corresponding wage growth implies a short-lived respite rather than sustained
improvement.
Exhibit 3
Wage and Salary Disbursements: Jan 2000–Mar 2011
http://www.tradingeconomics.com/united-states/wage-and-salary-disbursements-bil-of-$-m-saar-fed-data.html
These are the factors that drive every sector of real estate. The overall growth rate
(GDP) drives business production and profits. Increased production drives
employment, and employment produces the income that drives spending.
Of the three indicators, wage growth is typically the best leading indicator for
spending and job growth. However, the unemployment rate is falling and wage
8
growth is not significantly rising. This is a conundrum, the proverbial cart before the
horse.
A partial explanation may lie in the types of jobs that have been filled. The following
chart from the National Employment Law Project (NELP) reflects the shift from
higher-paying jobs to lower wage jobs in terms of gains and losses during and after
the recession.
Exhibit 4
The following comments are from NELP:
The period after the 2001 recession was dubbed a “jobless” recovery because of
its lackluster growth – but the current recovery looks far worse, on several
fronts. First, in terms of the rate of overall job growth:
• Following the 2001 recession, after a year’s worth of job growth, the
private sector had recovered almost half (47 percent) of the jobs it had
lost.
• By contrast, after a year’s worth of job growth, the private sector has to
date [February 2011] recovered only 14 percent of the jobs that it lost
during the 2008 recession.
Second, as shown below [Exhibit 5], the early job growth following the 2001
recession was more balanced than the early job growth following the 2008
recession.
• In the 2001 recession, higher-wage industries constituted almost a third
(31 percent) of first year growth.
• In the 2008 recession, higher-wage industries constituted only 14 percent
of first year growth.
Some of the current growth shortfall in higher-wage industries is due to the
specific drivers of the Great Recession – the collapse of the housing bubble and
the financial crash. But we are also seeing the impact of long-term trends, such
as the continued shrinking of manufacturing (both durable and nondurable) and
telecommunications. On the growth front, some of the trends are typical of early
9
recoveries (such as the high growth rate of temporary jobs), as well as cyclical
industries coming back with the growth in demand (such as retail and
restaurants), and steady gains in industries that are relatively immune from
recessions (such as health care, education and social services).
Exhibit 5
In Exhibit 6 we see the forecast unemployment rate continue to fall through January
2012, when the index bottoms at 8.1%, climbing to above 10% in 2013, before
beginning another decline in Q2 2013. This seemingly confirms the lack of wage
growth and low-wage hiring.
Exhibit 6
U.S. Civilian Unemployment Rate Forecast
Percent Unemployed, Seasonally Adjusted
Source: www.Forecasts.org
10
The rest of the story in the puzzling employment picture may be found in rising
productivity. Compare the following two charts with the unemployment graph. The
coincidence is not causal, but it is apparent that improved per unit labor costs at
manufacturers (the high-wage employers) is contributing to low job growth.
Exhibit 7
Exhibit 8
From the data presented here I take heed that the recovery is frail at best, and likely
to be marked with a protracted period of slow growth and a seesaw job market. This
is the muddle-through economy, the scenario in which we bounce along the bottom
for quite some time.
11
Capital Markets: The Lifeblood of Real Estate
As noted earlier, lenders are beginning to clear troubled CRE assets from their books.
This is extremely good news.
As conditions warrant, both internal to the lender and external in the market, lenders
are now selling properties rather than modifying or extending delinquent or
potentially troubled assets.
The following comment from Real Capital Analytics analysis of loan modification,
extension and liquidation activity in 2010 bears this out:
Supported by the momentum in investment activity and pricing trends for
property in general, lenders were able to liquidate a significantly larger
volume of loans during the fourth quarter of 2010. Of the $56.7 billion in
liquidations recorded since the beginning of 2009… 36% occurred in Q4 2010
alone.
Thus the regime of “amend, extend and pretend” that ruled in 2010 is likely over.
The trend of liquidation seems to so far be avoiding the problems of contagion—
when distress sales spill over to performing properties—as experienced in residential
(housing) markets.
This is what occurred in the 1991-92 recession as a glut of supply of distress CRE
properties overwhelmed the non-distress market and drove valuations to the cellar.
The comment with the Moody’s CPPI index [Exhibit 9] illustrates the non-event of a
crash in CRE prices: “Over the course of 2010, distress sales have accounted for a
larger share of volume in major markets than across all markets. But the major
markets have clearly exhibited stronger pricing trends.”
Commercial banks
Bank lending is increasing, but very slowly, and primarily with core customers. I’ve
seen this on a local level. In the past two months we’ve had more visits to our office
from bankers actively looking for business than in the last two years combined.
That’s the good news.
However underwriting standards are extremely tough. Anyone who has approached a
lender for income property financing knows what I’m talking about. Expect to show
everything about your financial life for the past three years, with complete
documentation.
Exhibit 15 depicts total bank loans and credit. The stress is not gone, but loan
volume is sideways rather than a steep decline experienced 2009 through early
2010. (Note: the steep increase in 2008 was due to businesses hitting credit lines
when commercial paper markets came to a halt.)
12
Exhibit 9
The sharp increase in early 2010 was a definite break with the ongoing contraction.
The forecast for bank credit is positive for the first time in two years:
Exhibit 10
U.S. Total Loans and Leases Forecast Trend
Past Trend Present Value & Future Projection
Source: www.Forecasts.org
But bank troubles are not over. There were 157 bank failures in 2010, an increase
from 140 in 2009. There are currently 753 banks on the “elevated risk of failure” list
compiled by Trepp LLC, a leading credit and structured finance ratings firm.
Bank profits are still depressed under pressure from loan losses, increased reserves,
expensive new regulations and limited loan demand. Between Q3 2007 and Q3 2010
bank profits fell 48% (Source: FDIC). Reserves are at all-time high levels, which
further choke available capital for loans.
13
Exhibit 11
I suggest checking up on your local banks to find out what kind of shape they are
really in. Many banks who are talking a public line of “we’re strong and we’re loaning
money” are in practice quoting painful terms for real estate investor loans. It’s their
way of saying they don’t really want them. Their real target is the Commercial &
Industrial sector (C&I), which are owner-occupied property loans for operating
businesses.
You can access the raw data that bank ratings are based upon for free. The Federal
Financial Institutions Examination Council posts the quarterly report known as a
bank’s “call report” on their website. The call report is a 30–35 page accounting of
every detail about the bank’s health, loan portfolio and troubled assets. The direct
link to FFIEC website is https://cdr.ffiec.gov/public/. If you take the time to browse
through a particular bank’s call report it can save a lot of time if you learn they have
problems. If you let a banker know you’ve read their call report it will give you
immediate credibility as an extremely knowledgeable businessperson. My guess is
that 99% of borrowers don’t know it exists, and the bank is certainly not accustomed
to hearing about it except from board members and institutional peers.
For professional interpretation of bank call reports and public filings I use Bauer
Financial at Bauerfinancial.com. Bauer compiles star ratings for every insured bank
in the country. The rating itself can be accessed free on their website, and they have
a range of reports priced from $10 to $49. The premium report is the equivalent of
the confidential CAMELS ratings of the FDIC. If you are serious about thorough due
diligence for banks I highly recommend the service.
Another source for bank ratings is Bankrate.com. While not as detailed or
comprehensive as the Bauer information, Bankrate also supplies free ratings along
with brief snapshots of the banks latest public filings.
Commercial Mortgage Backed Securities (CMBS)
Securitized finance is making a comeback. This is the preferred exit strategy of direct
investors in commercial real estate, once known as “conduit” loans. These are non-
14
recourse, fixed-rate loans priced at spreads over Treasuries. The loans have 20–30
year amortization and a typical 10-year term. Underwriting has always been tough
with CMBS, and the current environment is reported to be even more stringent, with
loan-to-values ranging 60%–70%, down from highs of 80%–85% in the boom years.
Before the crash Commercial Mortgage backed Securities (CMBS) captured the lion’s
share of commercial real estate finance, hitting a peak in 2007 of $230 billion in the
US. Then the sector collapsed in the financial meltdown of 2008. The chart below
shows the ugly picture:
Exhibit 12
Source: http://www.crefc.org/IndustryResources.aspx?id=13086
According to CMSA, 2009 loan volume was $3 billion, and 2010 had $12.3 billion
(though mostly single-payer loans).
On the loan performance side, while delinquencies are still rising the percentage of
loans being paid at maturity is also rising. According to Trepp LLC borrowers paid off
more than half of the securitized commercial real estate loans reaching maturity in
December 2010, marking the highest monthly payoff rate in two years.
The uptick suggests that replacement financing is growing more accessible to
borrowers. It also confirms the pricing data for CRE, because without adequate
comps new appraisals would make refinancing impossible. Of the $856.2 million in
CMBS loans that matured in December 2010, $441 million was paid on time, a
51.5% payoff rate.
Overall CMBS delinquencies continue to rise, to 9.15% in February 2011 [Exhibit 13].
15
Exhibit 13
But (there always seems to be one), the bulk of maturities are still to come. The next
chart is repeated from last year, and depicts the coming wave of CMBS maturities.
Exhibit 14
This explains why the expectations of a meltdown in CRE were overblown. The lion’s
share of 2005-2007 maturities, those loans made at the top of the market with the
weakest standards, do not occur until 2015. As the current crop of maturities peaks
in 2012 there is conceivably plenty of time for the market to clear distressed assets
and continue the improved pricing trend.
If CMBS is to regain a reputation of a viable and reliable source of debt, it will be
built from the top down. The issuances in 2010 funded large assets owned by
financially sound borrowers utilizing conservative underwriting assumptions. As
16
comparables are established and competition increases CMBS financing will again
reach Main Street and include smaller and lesser credit quality deals.
There are currently 14 active core CMBS lenders (up from five in 2009). Based upon
their volume projections, loan volume could increase to between $30 billion and $40
billion in 2011, roughly the 1997 level. I believe that in the next two years CMBS will
again be a viable financing product for direct investors. We need it to counter the
demand for bank loans, which is now the only game in town excepting, for the
moment, private capital which is increasingly being directed to real estate investors.
Capital Demand Alert: 2012–2014
The positive news above regarding bank lending and securitized loans should not be
taken to mean that capital supply will necessarily increase as time goes on. There is
a coming bubble of demand that will occur in 2012 from outside the real estate
markets that we as investors need to be aware of and watch carefully.
The Leveraged Buy Out (LBO) industry led by private equity firms originated
hundreds of billions in debt from 2007–2008 with 5- to 7-year maturities. The last
big deal financed before the 2008 implosion was the LBO of Hilton Hotels by
Blackstone Group. The banks were left hanging with that debt after the collapse, and
before the deal closed in December of 2008 it was restructured to spread the
maturity past 2012 in anticipation that demand for capital would be so high that
rates would be punishing to highly leveraged deals. Blackstone also began
negotiating extensions on its Equity Office Properties LBO loans in 2010 so they
won’t all come due in 2012–2014 when so many companies will try to refinance.
In addition, and closer to Main Street, our friends at the banks have their own
maturity bubble. It must be noted that for banks this is a fairly normal state of
affairs. Most commercial real estate bank debt has 3 to 5-year maturity. Whether or
not these loans can be rolled over—the usual practice in normal times—will also
depend on capital demand in addition to property performance and valuations. The
following chart breaks the loan universe into type and maturity.
Exhibit 15
The bank loan maturity peak in 2011–2013 coincides with maturing Wall Street LBO
debt. This demand will likely make capital more expensive until demand subsides,
independent of potential market-based rate pressure over the next 24 months.
17
This is a case where we can observe the biggest players and emulate their actions
for immediate benefit. If Blackstone Group, with almost a trillion dollars in assets
under management, is negotiating loan extensions two years early because they see
the threat of a demand bubble, then it behooves us to pay attention and do likewise.
My suggestion is that if you have loans maturing next year, start the process of
finding a new loan now, before the wave of demand arrives. As much as we’re
whining now about tight credit, 2012 could be as tight or tighter.
Interest Rates
Last in the big picture we turn our attention to interest rates. We’ve continued to
enjoy the lowest rates of modern times, though as a friend of mine says, what
difference does it make how low rates are if you can’t get a loan?
Good point, and though it is heresy for a real estate investor to say so, I think part
of the cure for tight credit is higher rates! Seriously, the combined effects of an
increased risk profile in CRE assets, lack of securitized financing, sky-high bank
reserves and low rates on deposits retards capital formation, volume and velocity.
Banks have little incentive to loan, and depositors less incentive to put capital in
banks at such low rates. There is a silver lining. This state of affairs has produced
new opportunities in private capital markets and the rebirth of syndication structures
to pool investors in an investment. It is critical to use expert advisors for a
syndicated investment.
There is a raging battle among economists and money runners as to which scenario
will play out: a continued regime of super-low rates driven by lack of demand and a
deflationary economic outlook; or a significant increase in rates brought about by a
two-pronged attack—high inflation caused by central banks exponentially increasing
money supplies, and “bond vigilantes” punishing governments for record deficit
spending as far as the eye can see.
We will not attempt to settle the argument here, but there are several books recently
published that make opposite arguments. John Mauldin’s Endgame just appeared in
March 2011 and takes the position that this is the end of a 60-year debt supercycle,
forcing the lowering of leverage at all levels from governments to households. A.
Gary Shilling takes a similar view in his The Age of Deleveraging. Making the
opposite case is Michel Murphy in Survive the Great Inflation. All three books are by
highly regarded economic minds and I refer you to them for further reading.
The arguments are not merely academic. The conditions present real and lasting
stresses on the capital markets. For our purposes we will concentrate on the outlook
for two sets of interest rate data: the Prime Rate and the Treasury market. These
directly affect the availability of debt capital to CRE direct investors.
Prime Rate
The next chart is the historical and forecast Prime Rate, the rate charged by banks to
its best customers. Prime bottomed in 2009 at 3.25% and has stayed there, set as a
three-point spread above the Fed Funds rate of 0.25%. Last year the consensus
forecast of analysts was for rates to begin rising in Q2 2011, with Prime going to 5%
by year-end 2011.
18
Exhibit 16
Prime Loan Interest Rate Forecast Trend
Past Trend and Future Projection
Source: Forecasts.org
As 2010 progressed, it was apparent the recovery was barely sustaining positive
growth rates. The Federal Reserve launched Quantitative Easing, Round 1 (QE1), by
purchasing $600 billion in the treasury market. Rather than having the desired effect
of lowering already low mortgage rates, the bond market responded by increasing
rates on Treasuries by 75 basis points (.75%). Later in the year the recovery had
still not attained escape velocity, and the Fed launched QE2, another round of
easing. To date it has had little effect on rates.
As a result the Fed was seen as unable to raise the fund rate for fear of stalling the
nascent recovery. The projection above again anticipates the Fed to being raising
rates a year from now, in Q2 2012, but at a much slower pace than the previous
forecast, with an end range forecast of 4.5% in January 2014.
I find one disturbing fault with this projection; it is almost unheard of for the Fed to
raise rates in a Presidential election year. IF the recovery surprises to the upside,
and IF the unemployment rate continues to fall, and IF the CPI price index stays at
or below 2.5% on the high side, then it is possible that rate increases early in the
year could be absorbed without severe political fallout.
If this scenario unfolds, the increases will be announced well in advance, likely in the
September 2011 statement of Federal Open Market Committee (FOMC). Increases
would begin in March 2012 with a 25 bps (.25%) increase, raising Prime to 3.5%,
followed by a July increase to 3.75% where it will stay until year-end, well past
Election Day and the typical year-end demand for capital to close books.
This is a plausible, but in my mind an unlikely scenario. The more likely pressure for
rising rates lies further out on the yield curve, in the treasury bond market and the
influence of increased capital demands in 2012–2014.
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Treasury Rates
As of this writing (late March 2011) the 10-year Treasury rate is at 3.44%. In the
current cycle it peaked in April 2010 at 4.01%, fell back to 2.5% in August, and
peaked again in January at 3.7%, stuck in a range-bound series between 3.2% and
3.75%. (Interestingly, the peaks coincided with the QE1 and QE2 announcements.
Bond yields rise as prices fall.) The following chart predicts more of the same
through Q1 2012.
Exhibit 17
Ten Year U.S. Treasury Securities Yield Forecast Trend
Past Trend Present Value & Future Projection
Source: Forecasts.org
According to this forecast, beginning in Q2 2012 the rate is projected to begin a
march back to above 5% in Q4 (November) 2012. I do not think it is coincidence
that the rise coincides with the capital demand we identified previously. This is the
rate most often used as the benchmark for CMBS rates. For banks, the 3–year and
5–year Treasury are more common as benchmarks for commercial real estate loans.
Exhibit 18
5 Year U.S. Treasury Note Yield Forecast Trend
Past Trend, Present Value and Future Projection
Source: Forecasts.org
20
The outlook on the shorter durations is similar. The 5-year is currently at 2.18%,
projected to decrease to a low of 1.44% in September 2011, and then increase to
3.45% by year end 2012. Again, it is not a coincidence that this matches the
anticipated demand for capital.
A side note: if these scenarios occur, it is more notable for what it doesn’t do:
produce an inverted yield curve signaling a recession. An inverted yield curve (when
short term rates are higher than long term rates) isn’t a guaranteed indicator of
recession, but it’s right more often than not.
Commercial Real Estate Performance
As we anticipated, 2010 commercial real estate transaction volume increased
substantially over 2009. The increase was a seemingly whopping 109%, but that’s
hardly something to cheer about as 2009 was one of the lowest years on record. A
surge of transaction volume in December helped to push U.S. commercial real estate
sales to $115 billion for 2010, up $54.6 billion in 2009 (Source: Real Capital
Analytics, excludes sales above $5mm). In fact, 2010 volume is just getting back to
“normal”—meaning pre-boom—levels.
The following chart from Real Capital Analytics depicts the improved sales activity.
According to RCA, “the surge is part of an ongoing recovery in investment sales that
nudged monthly volume beyond the $10 billion mark last summer. Fourth-quarter
sales of approximately $46 billion are comparable to quarterly sales volumes in
2004, [and] 2004 is considered a healthy recovery year.” (Real Capital Analytics
tracks transactions of $5 million or more.) Exhibit 19
Also as expected, 2010 prices bumped along the bottom. The Moody’s/Real
Commercial Property Price Index (CPPI –Exhibit 9)) moved mostly sideways, with
small quarterly increases followed by decreases. We finished the year about where
we started, which beat the alternative of falling further below 2009 levels.
Further, the indication is that the market is clearing distressed assets without a
meltdown. These comments from David Geltner in the January issue of The
Professor’s Corner:
As the number of sales out of distress has picked up, their influence on the
aggregate index has increased. In December, for example, sales out of
21
distress increased sharply as lenders sought to clear assets off their balance
sheets before year-end. Conversely, sales out of distress may account for a
smaller share of repeat sales [going forward], allowing the CPPI to rise as the
pool of transactions shifts to performing properties.
In this context, a falling value for the index is not necessarily indicative of
market weakness; quite the opposite, it may suggest that sales out of
distress are increasing because lenders judge that the markets’ capacity to
bear those sales has improved. –The Professor’s Corner, March 3, 2011
Exhibit 20
Source: http://web.mit.edu/cre/research/credl/rca.html
Also: http://www.realindices.com/cppi_reports.htm
In addition to the surge of the “what”—i.e. investment-grade and distressed
properties—it is just as important to consider the “where”. The increased transaction
volume occurred mainly in primary markets. The following chart from David Geltner
of Geltner & Associates reflects the influence of sales in “trophy cities”.
Exhibit 21
Source: http://www.realindices.com/professors_corner.htm
22
This is typical of recovery dynamics. Buyers tend to emerge in the major markets
first because the risks are less than smaller markets. As a result many investors
compete for the same properties, which drive up prices in those markets. The natural
progression will be to secondary markets, which is already occurring.
This has been described by Geltner as a trifurcated market: trophy properties,
distress properties, and everything else, labeled “Other”. The “Other” properties are
those that are neither technically distressed nor trophies. They represent the broad
middle of the market and are of most interest to direct investors.
Encouragingly, the Q4 numbers offer the strongest evidence to date that a recovery
is underway and supported at depth. The “Other” index posted the largest gain of
any segment through November 2010. It is now up 10% from its 2009 bottom.
Exhibit 22
Source: http://www.realindices.com/professors_corner.htm
This indicates that the potential “negative bubble” in 2010 for commercial real estate
did not develop. The negative bubble is defined as an overshoot to the downside in
valuations, caused by distress property pricing dragging all other classes below
historical values. For owners this is good news. For vulture acquirers anticipating a
fire sale—not so much.
We have a new data source for the “other” category not covered by the Moody’s
CPPI. In 2010 CoStar Group began publishing the CoStar Commercial Property
Repeat-Sales Index (CCRSI). The CCRSI is dominated by smaller properties below
the $2.5 million threshold employed by the CPPI. In addition, CoStar has a database
reaching back 20 years as compared to the RCA-Moody’s database of 10 years. Both
use same-property pair tracking. RCA filters for an 18-month hold time, and CoStar
filters for a 12-month hold (matching the capital gains threshold) to eliminate flips.
Having two indices tracking commercial real estate will offer an interesting
comparison tool going forward. In comparing the CCRSI index with the CPPI confirms
a bottoming of valuations around the 2004 level.
23
Exhibit 23
National Composite Monthly Indices
Source: http://www.costar.com/ccrsi/index.aspx
CoStar makes two pertinent comments regarding the CCRSI index. (Remember that
the CCRSI captures all sales, as compared to sales above $2.5 mm in the
RCA/Moody’s pricing index, and above $5mm for the RCA volume index):
•
The increase in Investment Grade repeat-sale transactions reflects trends in
the broader market. CoStar tracked more than $211 billion in total sale
transactions in 2010. This is a 79% increase over 2009 sales volume for all
sales. While the market is clearly recovering sales transaction volume still
remains 63% below the market’s recent peak volume level.
•
CoStar’s General Grade Index is down 11.3% versus the same period last
year, reflecting continued downward pressure on general commercial property
values. It did, however, start 2011 on a slight up-note, increasing 0.4% for
the first month of 2011. After being down for the past three months at -2.4%
and down -11.3% for the past year, the smaller property index may be seeing
the specter of bottom for the first time in the past three years.
Exhibit 24
Exhibit 14 depicts pricing by geography. Commercial real estate in the Northeast
region of the United States leads the nation in terms of strengthening pricing having
recovered 23% of its pre-recession pricing levels. The Southeast region of the
country is the only other region that has recovered a portion of it pre-recession
pricing levels gaining back 14%.
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Exhibit 25
U.S. Regional Quarterly Indices through December of 2010
Source: http://www.costar.com/ccrsi/index.aspx
We close the Part 1 “big picture” forecast on a humorous note.
There is an old joke that economists have predicted 9 of the last 6 recessions.
I’ve told that joke many times in speaking engagements and it always gets a laugh—
except in a room full of economists.
I ran across an interesting graph sometime in the past few months that reveals the
truth is actually worse than the joke. This chart is from the Federal Reserve Bank of
Philadelphia:
Exhibit 26
That’s right; the truth is that the consensus forecasts since 1972—the last forty
years—have correctly predicted a recession exactly zero times. Remember that when
you read the headlines about economic matters. The reporting is no better than the
source.
We now turn to Part 2, the outlook for commercial real estate by property type. In
light of the above chart, I feel fortunate to be a contrarian by nature!
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2011–2012: Commercial Real Estate Forecast
Part 2: Forecast by Region and Property Type
The Turning Point: The Cycle of Recovery
Current Conditions and Outlook:
• Retail
• Office
• Multi-family
Resources
Now that the data overload in Part 1 is behind us, let’s apply what we know of the
forecast economic and financial conditions to specific property types.
Following that we will examine the performance of property types by region. Then to
bring the discussion full circle we’ll take a look at the tools available to find and
investigate specific markets and investment strategies that work in the expected
future conditions.
My objective is to arm you with the knowledge of the conditions you will face over
the next two years, how to avoid known pitfalls and capitalize on opportunities. The
economic and financial environment is fluid and as the situation changes we have to
change. The trick is to spot when new events cause conditions to significantly deviate
from the expected path. With the background data in this forecast you have the
frame of reference necessary to judge that for yourself.
The Turning Point
A year ago I was skulking around our office whining and moaning about the phone
not ringing. Nothing was moving. Stubborn sellers were stuck in 2007 prices; tenants
alternately begged and demanded rent concessions; and banks treated real estate
investors like red-headed stepchildren (my apologies to freckle-friendly families
everywhere!). Everyone was hurting and no one had the cure.
Something had to give.
A great analogy is a story told by the late comedian Jerry Clower. A hunter chased a
wildcat up a tree and they commenced a vicious battle, fangs bared and knives
drawn. They chased each other around the tree branches, scratching and slicing each
other to ribbons. The hunter calls down to his buddy, “Shoot him, shoot him!” His
buddy yells back, “I can’t shoot. I might hit you!” The wildcat lunges at the hunter,
drawing blood with the swipe of a claw. The hunter stabs back at the cat, and then
screams, “Just shoot up here amongst us! One of us has got to have some relief!”
Fast forward a year; we’ve definitely gotten some relief, and the wildcat of
uncertainty is at least on a leash, if not yet caged. As we learned in Part 1, the
general CRE markets seem to have bottomed and while we aren’t in for a rapid
recovery we don’t anticipate major downside risks either.
On a personal level I can feel the difference. Our phones are ringing with tenant
inquiries for space and brokers offering well-priced, quality properties with sellers
anxious to deal. In the past few months we’ve put two properties under contract to
purchase and are working on two more. We’ve acquired new tenants and renewed
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leases for over 30,000 square feet of space; been engaged by two clients for new
site-location projects; and have two redevelopment projects underway. Now I’m
whining and moaning about having too much to do and not enough time to do it,
which just proves that I’m a card-carrying grumpy old man.
As mentioned earlier, local bank loan officers are scheduling visits to our office with
their CEO’s and regional Presidents. Since it says “Commercial Real Estate” on the
sign out front it’s safe to say they’re not here looking for credit card accounts.
Seriously, the fact they are out asking for business again is huge, the best indicator
yet that we’ve reached a turning point.
So I bring a renewed optimism to this year’s survey of the conditions and outlook for
the specific property types. My objective is to separate true opportunity from
illusions, and chart a course based on the facts as we find them.
The Cycle of Real Estate Recovery
We will start with a brief historical review. I like the adage “History doesn’t repeat
itself, but it often rhymes”. We have ample data that shows the progression of
recovery in the three major real estate downturns prior to this one.
Chart 1
Source: http://web.mit.edu/cre/research/credl/rca.html
The 1987–1992 downturn was caused by one event; 1986 tax reform. (This is my
“DC factor” at work). The 1998–99 downturn was mild by comparison, driven by a
financial crisis which reduced transaction volume, offset by inflation that protected
appreciation rates. The 2001–02 recession was the combined effect of a general
slowdown that began in mid-2000, but didn’t turn to a recession until after the
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9/11/2001 terrorist attacks. This ushered in an era of low rates, loose money, the
greatest boom ever, and ended in greatest bust.
The point is that increases in the composite numbers for 2010 mirrors prior
recoveries. In fact the commentary that accompanied the Moody’s report gushed
with optimism:
Transaction prices of commercial properties sold by major institutional
investors gained 11.9 percent in the fourth quarter, and 19.3 percent for all of
2010, according to an index developed and published by the MIT Center for
Real Estate (MIT/CRE).
Both of these returns were the second highest in the history of the index,
which goes back to 1984. (The record-holding quarter remains the second
quarter 2005 which had a 17.8 percent gain, and 2005 was the record year
with a 27.2 percent price increase.) Measured on a total return basis,
including net income generated by the properties (as well as the price gain),
the 2010 result was 25.2 percent, which was also second highest after 2005’s
32.2 percent. On an accumulated total return basis (including income) the
index is now only 15.7 percent below its 2007 peak.
--MIT Press Release Wednesday February 2, 2011
To pick the most apt comparison, the upturn that began in 1992–1993 is most like
the current conditions. Now, as then, the market is coming off a profound financial
crisis coupled with massive government intervention. If history rhymes, then the
appreciation trends are soundly in our favor. The best time to buy is not at the
bottom, but on the bounce, assuming it is a sustainable trend and not an anomaly.
However, keep in mind the previous chart is a composite of all transactions. In order
to detect the winners and losers it is necessary to dig further into the numbers. We
will now slice the data to expose the variances.
Outlook by Region
As I wrote in last year’s forecast my 2010 plan was to pursue targeted property
types in markets where we already own properties, farming for deals from banks and
motivated sellers. I defined myself as an opportunistic buyer, but wary of chasing
falling knives. This strategy was really about waiting for indications the bottom had
been reached and the worst was over.
It came. This is the point I’ve been waiting for. Investing in the right sectors and
markets just as a recovery begins historically offers opportunities for above-normal
gains.
However, the upturn is in its early stages and not evenly spread. Some of the areas
hardest hit economically are still struggling. Recovering markets have different
characteristics driven by uneven population migration and job growth, so my
comments regarding general trends for property types must be evaluated in light of
your specific market conditions.
We will start by revisiting the national trends. The first chart depicts the composite
transactions (all property types) by region.
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Chart 2
U.S. Regional Quarterly Indices through December of 2010
Source for Charts 2 — 6: CoStar Group CCRSI
http://www.costar.com/about/CCRSIndices.aspx?id=9557
All regions posted gains in Q3 2010, but only the Northeast and the South sustained
the gains through year-end. The Midwest is showing the lowest performance, and the
West slumped somewhat. Time will tell if this is a geographic division or one more
strongly influenced by supply, demand and price levels. The West was hit especially
hard in the housing meltdown and areas with large numbers of unsold inventory
continue to struggle. The Midwest historically doesn’t experience the booms or the
busts in the same severity with the coasts.
The next four charts dissect the regional data into property type. As you will see, the
regional property type data is a mixed bag. The Northeast and South show upturns
for multi-family and office, while the West and Midwest underperformed in all types.
Chart 3
U.S. Northeast Property Type Quarterly Indices
29
Chart 4
U.S. South Property Type Quarterly Indices
Chart 5
U.S. Midwest Property Type Quarterly Indices
Chart 6
U.S. West Property Type Quarterly Indices
30
Outlook by Property Type
The previous discussion was about valuations and pricing. Now we turn to property
fundamentals.
Multi-family: The turnaround in multi-family fundamentals is significant. Demand is
coming from all directions, including foreclosure refugees, echo-boomers, and
empty-nesters. Supply is constrained by the lack of development funding for any
speculative projects, producing superior pricing power in rents. Mobile home parks
and manufactured housing are regaining market share in affordable housing.
The demand for rental housing is fueled by two overlapping trends:
•
A generational “double-whammy”; over half the US population belongs to two
age groups: 18–34 (echo boomers) and 50–64 (baby-boomers). Both groups
are at life stages where rental housing is a best choice.
Chart 7
Source: 37th Parallel Properties; http://www.37parallel.com/
•
Plummeting home ownership rates. With the glut of housing supply and
continued price declines it makes little sense to buy a large asset that will
likely be worth less next year. Home ownership rates are forecast to fall back
to the historical trend level between 64%–65%.
Chart 8
Source: A. Gary Shilling’s Insight; March 2011; www.agaryshilling.com
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Performance fundamentals for multi-family confirm the demand trends. On a national
basis vacancies are decreasing and rents are increasing.
Chart 9
Q4 2010: National Apt. Vacancy
Q4 2010: National Apt. Rent
National Apartment Supply
National Apartment Inventory
Source: www.Reis.com
(Note: The charts for each property type by region are available at the Reis.com
website with free registration.)
The present and forecast fundamentals for apartments are extremely positive, much
more so than a year ago. The peak in vacancy passed in 2009, and as vacancies
decreased rents rose in 2010.
Bear in mind that forecast rent and vacancy are based on forecast supply levels.
2010 completions of new supply is projected to be about 50,000 units, predicted to
increase to approximately 100,000 units annually in 2012 through 2015. Demand,
will keep absorption levels below new supply until about 2015.
Beware over-building on a local level. The typical cycle for apartment supply and
demand ratios to cross is about seven years. As rents and occupancies rise it gains
quick attention from developers. The permit-to-completion process is an average of
about 18 months. New projects will continue to be developed until absorption
catches up and the rate slows.
Usually the lag time produces more units than can be absorbed without rent cuts for
about 18 months after the peak level of demand. This creates a typical cycle of about
3–4 years before a market is overbuilt. Absorption then takes 2–3 years to catch up,
and the cycle repeats. I’ve watched multiple cycles in different markets for over 30
years. The time to acquire apartments is now. Don’t wait to buy after development
activity is at full throttle. That puts the buyer in the position of flat rent growth in the
first year of ownership.
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Office: (In full disclosure, my company’s portfolio has shifted to about 60% office
properties over the past five years. I hope there is no unconscious bias, but
regardless I’m personally on the line for being right or wrong.)
Whatever your politics, the recent expansion of government programs for everything
from highways to GSA renovation projects has created a growth spurt for
professional services firms and relocating government agencies. Medical offices are
expanding in anticipation of the coming wave of an additional 30 million insured
patients. Small firm start-ups are increasing, while some larger firms are still
downsizing, creating space absorption from the top and bottom of the market.
Q4 2010: National Office Vacancy
National Office Supply SF
Chart 10
Q4 2010: National Office Rent PSF
National Office Inventory
Source: www.Reis.com
The office and retail sectors lag the general economy by about a year. This is
apparent with the comparison of multi-family fundamentals. All sectors are directly
impacted by the job market, but in different ways.
Office is more sensitive to job growth than income. Unless employers are hiring, net
absorption levels will fall. The forecast absorption levels are positive, partly due to
the lack of overbuilding. Office development is typically slower to react, the deals
take longer to complete, and there are barriers to entry in many markets. It is
estimated that over 75% of the national office supply is over 20 years old.
The astute reader will recall that the unemployment rate is forecast to increase
beginning in Q2 2012 through Q2 2013 (see Exhibit 6; page 10). This conflicts with
the above projection for office absorption. I do not have a solid explanation for the
discrepancy, but will hazard to guess the difference may be explained by the type of
jobs created. The highest early recovery job gains are in administrative support and
temporary services, both office users. Growth in professional services—specifically
legal, medical and accounting—is forecast to grow above trend in conjunction with
more health care users, government regulatory agencies, and evermore complicated
tax laws.
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The brightest spot in the office market is in medical office buildings. In his January
2011 INSIGHT newsletter, investment analyst Gary Shilling published his annual
forecast. He included the following comments in suggesting medical office buildings
as one of his nine “buys”:
Health care is a huge sector, accounting for 16% of GDP and growing rapidly.
Two major features of the current system almost guarantee explosive growth.
First, most Americans don’t pay directly for their health care, which is
financed by employer-sponsored insurance or the government through
Medicare and Medicaid. […] There’s no restraint on usage. Second, in paying
for service plans, medical providers have many incentives to perform extra
procedures. Defensive medicine with more procedures is encouraged to avoid
litigation over mistakes.
The demand for medical services in the U.S. will mushroom over coming
decades due to several factors:
•
•
•
•
•
•
Aging Population. Those over 65 have three times as many office visits
per year as people under 45, and the oldest of the 78 million postwar
babies will reach 65 this year and the youngest in 2029.
32 million more Americans will be covered by health insurance under
the new health care law, an 11% net addition by 2019.
More Jobs. Increased demand for medical services in the years ahead
will create jobs, but not enough to absorb all the unemployed in an era
of slow economic growth. Slow growth and high unemployment will
encourage the uninsured to join government health programs.
Little Supply Increase. The new health care law does little to increase
the supply of medical personnel and facilities, but booming demand
will result in the rapid growth of both, with the latter largely financed
by private investments.
Cost control pressures from government and employers will work to
the advantage of big, profitable hospital systems with large campuses
and expanding satellite facilities. Renewed growth in cheaper outpatient surgical and other facilities will also be a result of emphasis on
cost containment.
Hospital-employed physicians will increasingly dominate as medical
recordkeeping requirements, cost containment pressures from
government and insurers, constraints on government reimbursements,
expensive new technology, the lack of economies of scale and high
practice management costs, and lower incomes relative to hospitalemployed physicians weigh on small private practices.
These trends favor investments in medical office buildings (MOBs) that
increases and shifts in demand will require, including related outpatient
facilities such as ambulatory care facilities, surgery centers, ambulatory
surgical centers, and outpatient cancer and wellness centers. MOB demand is
forecast to expand 19% by 2019, 11% of it due to the new law and the rest
from population growth. The 64 million square feet required to meet the
demand of the new law compares with a 2010 build of 7 million square feet.
MOBs are much less volatile than other commercial and residential real
estate, as shown by more stable vacancy and cap rates. They will not be
plagued in future years by persistent excess capacity […].
(Source: A. Gary Shilling's INSIGHT; January 2011; www.agaryshilling.com)
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Our company has been successful with downtown and suburban office buildings,
even through the downturn. I have always liked county seats and college towns, and
in one of our markets we’re fortunate to have both. County seats have courthouses,
and that’s where lawyers, bankers, accountants and government agencies are found.
Demand is steady and pricing power for rents is enhanced by limited supply and high
barriers to entry. Fully developed downtowns require demolition of existing
structures to build new ones, an expensive proposition.
However, downtowns are notoriously inconsistent. Some have full buildings and
great amenities, including the increasingly popular wave of creating residential
projects out of old office and warehouse buildings. Others are ghost towns, with
empty streets and little to draw any appreciable traffic for retailers or amenities to
offer office workers. Look for those with beautification projects underway or on the
drawing board. Theater restoration projects, coffee shops, art galleries or farmer’s
markets are good indications of a rising downtown area.
Retail:
This is the sector I still consider schizophrenic, and the numbers bear me out over
the short term. I participated in the retail building boom 2002-2007 and rarely see a
market that isn’t saturated or overbuilt.
Q4 2010: National Retail Vacancy
National Retail Supply
Chart 11
Q4 2010: National Retail Rent PSF
National Retail Inventory
Source: www.Reis.com
As a member of the International Council of Shopping Centers (ICSC) I saw firsthand
the fall in demand as retailers began cutting their expansion plans in 2007–2008,
and none but the discounters have reversed course as yet. The forecast vacancy,
supply and absorption rate reflects the weak conditions, and point to the bottom
being at least a year away.
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Further, declining consumer spending and a rising savings rate (from 0.5% to 5.5%,
2001–2010) are mutually exclusive trends. As consumers and households pay down
debt levels, less money is available for discretionary spending. Retail is more
sensitive to income than job growth, so factor in high unemployment and flat wage
growth discussed in Part 1 and the near-term outlook for retail is scary.
In the most overbuilt markets neighborhood strip centers are suffering from high
vacancies and a surplus of space constructed during the boom. It’s a buyer’s market,
but caveat emptor (buyer beware). That property advertised at fifty cents on the
dollar might be worth a quarter with a tenant failure or relocation to newer space at
cheaper rents.
However, there are bright spots. I maintain contact with a lot of people in the retail
industry because we still own several retail properties. The properties are stable and
doing well, due in large part to our market due diligence when we built or acquired
them. Deep down I love the sector and will re-enter in a heartbeat when the
opportunity arises. Many of the retailer reps, brokers and developers I have worked
with over the years have successfully adapted with re-use of existing properties such
as closed video stores on good corners; acquisition of strong grocery-anchored
neighborhood strip centers; and additions to existing centers where critical mass is
already in place.
The brightest spot in the sector is single-tenant, triple-net leased retail properties.
Known as net-lease, or the acronym NNN, the type is attractive for several reasons.
Tenants are generally national companies with excellent credit ratings, long-term
leases, and the tenant is responsible for maintenance, taxes and insurance, hence no
management responsibilities to the owner.
Transaction volume in this segment is strong and valuations have remained high.
Cap rates for Class A assets have risen only about 1 to 1.5 percentage points off the
2007 peak of 6% [as prices rise the cap rate falls]. Today new Walgreen’s properties
have asking caps of 7%–7.5%, lower on the west coast and major metros.
Single-tenant broker specialists I know in the sector tell me the biggest problem is
lack of supply due to the still low amount of new store construction. Few assets are
resold in this category due to the attractive benefits, and most wind up either with
large institutional owners (e.g. REITs and pension funds) or in portfolios of high net
worth individuals to fill estate planning strategies.
2011: The Time to Act, Intelligently
With all this positive activity I believe the waiting is over, that when we look back
years from now, 2011 will be considered the foundation year for a new era of
wealth-creation in commercial real estate.
Demand for income producing real estate will rise as retiring baby-boomers search
for secure income streams with tax benefits. Younger investors have a prime
opportunity to create the product this market will be looking for, and be paid
handsomely for the effort. Remember the demographics; over 10,000 boomers will
be retiring per day, for the next 20 years. By any estimation this is a huge market
with demand built from necessity.
But don’t fall into the trap of doing deals just to be doing something.
A rising tide may float all boats, but it also hides a lot of stumps.
--Jim Clayton, founder of Clayton Homes
36
It is not overly dramatic to state that the huge changes in demographic and financial
trends cannot be ignored. These have major implications for structuring commercial
real estate investments to fit the realities of a muddle-through economy.
Times like these are rife with the pitfalls of unfocused strategies. I’ve written
elsewhere about the importance of having a predetermined plan to guide investment
decisions. This is the only way to distinguish “stumps” from true opportunities.
I hope this report has been enlightening, and will be helpful in planning your
investment course. I wish you the best in reaching your goals.
With warm regards,
Ray Alcorn
Resources
It is beyond the scope of this forecast to offer implementation strategies for real
estate investments. As a shameless plug, I have several products available which
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DealMaker's Guide to Commercial Real Estate
DealMaker’s Guide Video Seminar & Workbook: Getting Started in
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About the author...
Ray Alcorn is CEO and a principal of Park Real Estate Inc., a commercial real estate
development and investment firm based in Blacksburg, Virginia. The company owns
and manages a portfolio of retail, office, and hospitality properties.
Ray hosts the Commercial Real Estate Discussion Forum at CREOnline.com, where
he answers questions and participates in discussions with other investors.
In his home study course, DealMaker’s Guide to Commercial Real Estate he
shares a lifetime of experience investing in commercial real estate. This book
provides real-world information written by a true dealmaker, including how to design
your personal investment criteria to fit your overall life goals. It is an invaluable
resource for creating and building wealth in commercial properties of all types.
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