Despite Substantial Worries to the Contrary, Predictions of a Strong CRE Rebound Proved More Accurate
As the end of 2013 approaches, we thought it would be interesting to check back in on some commercial real estate
predictions we highlighted at the start of the year. As it turns out, there were some pretty reliable soothsayers.
Predicting the year was by no means an easy task a year ago when the rattle of collapsed economy was still reverberating and lots of doubts lingered over the strength of a recovery.
Among the more prescient predictions we highlighted in January were ones from Jones Lang LaSalle, Cushman & Wakefield, Blackstone Group President and CEO Tony James, the Robert W. Baird investment firm, and (in our humble opinion) CoStar Group.
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Prediction: 2013 was expected to be a turning point for the economy and the CRE industry, according to Cushman & Wakefield’s Global Economic Pulse Forecast. While 2013 started off with the same slow pace in keeping with the slowest economic recovery on record, C&W said the stage was set for a significant turn-up in market sentiment by year end, setting the stage for a strong global rebound in 2014 and beyond.
Reality: It didn’t take long for the CRE turn-up to begin. First quarter sales were up notably from the year earlier. But as predicted, market strength picked up notably as the year went on. In fact, third quarter sales totaled more than $103 billion -- an accomplished that hadn’t happened since 2006 for a non fourth quarter period.
Prediction: The CRE industry's measured and steady recovery was expected to bolster a 20% growth in the investment market with demand up particularly in multifamily, office and industrial sectors, according to Jones Lang LaSalle's 2013 Cross Sector Survey.
Reality: Through the third quarter of this year, investment sales were up 27%, according to CoStar COMPs data. Industrial investments were up 56% and office up 27%; however, multifamily investments tapered off this year and were actually down about 6%.
Prediction: The earliest buyers in the Great Recession would be the sellers in 2013, according Blackstone’s James.
Reality: James obviously had some insider knowledge on this prediction, but isn’t that what experts rely on? Institutional selling was strong in 2013. Just as The Blackstone Group kept the capital markets busy in 2011 and 2012 raising more than $16 billion through private fundraising efforts, it also kept them equally busy this year cashing in on those investments mainly through the public markets. Blackstone Group cashed out on at least six investments by taking them public in 2013.
Prediction: Prospects for 2013 were strong, particularly for real estate investment trusts looking to raise capital by going public and for a pickup in secondary and tertiary market activity, the real estate banking team at the investment firm Robert W. Baird predicted.
Reality: Again, just look at the initial public offerings Blackstone undertook in 2013. But also with the economy continuing to strengthen, more opportunistic investors - in many cases priced out of the top coastal markets like San Francisco, New York City and Washington, DC,. -- went seeking higher yields in secondary markets where job growth and business conditions have accelerated during the economic recovery. Markets such as Nashville, Salt Lake City Indianapolis, Phoenix, and Jacksonville and Tampa, FL, were noted in CoStar stories this year.
Prediction: CoStar ran two stories early this year predicting 25 of the most likely publicly held companies that would be buying property this year and 25 of the most likely publicly held sellers.
Reality: It was easier to predict the buyers than the sellers. Overall, the 25 sellers we identified received net proceeds of more than $11.8 billion from the disposal of properties through the first nine months of the year. True, though, they also paid out more than $11.3 billion in cash for new investments. Still, only eight of the 25 firms we identified were net buyers of properties and we also picked out eight firms that showed no cash outlay for new properties this year.
On the buy side, the 25 firms we identified paid out more than $15 billion for new property investments in the first nine months; they received only about $2 billion in net proceeds from property sales.
Not every prediction we highlighted turned out so accurately; this was particularly true when it came to the stock-and-bond markets.
We won’t single out those who didn’t do as well on their predictions, but will point out that the commercial mortgage-backed securities bond market went viral with new issuance levels greatly exceeding predicted levels. The expanded investment activity, the greater appetite for risk and interest in smaller markets among investors drove competition among conduit lenders.
Also, while REIT stocks, which had been riding a long bull market going into this year and did manage to continue their upward momentum through May, since then REIT stock prices have steadily declining, according to most REIT indexes, reflecting in part investor concerns over rising interest rates and the prospects for more rate increases in 2014.
But predictions for 2014 are another story entirely; stay tuned.
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