Adam
Or so those in the real estate investment management sector must be feeling. As the music has stopped, are there sufficient chairs?
The extraordinary rise of the institutional investor in real estate for the past twenty plus years spawned an equivalent rise in the number of real estate investment managers of all sizes and types: equity, debt (whole loan and securitized), securities, international, sector specific, geography specific, etc. Now we see a precipitous drop in the level of new capital to be provided by such institutions as they face issues of liquidity, and consequently we may well see a corresponding reduction in the sector that serves them.
We categorize today several classes of investment managers: those that are large, international and subject to foreign institution and government issues; those that are large/midsized domestic and international, but independent, owned either by private equity platforms or entrepreneurial participants; and finally, those that are small, independent and entrepreneurially owned.
We are entering a period of account transfers. We are entering a period of “zombie” managers, i.e. those that cannot raise and invest capital on a go forward basis. We are entering a period of consolidation, which will be a difficult process of transfer. The landscape of providers may look materially different over the next five years (as it did after the commercial real estate breakdown of the early 1990s).
What will characterize the survivors?
1. Certainly a minimum “size” or Assets Under Management, allowing for financial flexibility and the ability to retain and hire the best human capital during these difficult portfolio times.
2. The ability to fund future co-investment and therefore invest institutional capital, if raised.
3. An enterprise that is managed with good, if not best practices versus simply serving as a “deal shop.” We will see both the enterprise-based model and the deal-based model, but the latter will have core aspects of strong enterprise management.
4. Teams of managers that are “rowing” together versus the stress that we see developing between teams of managers. Breakdown in the leadership of managers is the surest way to bring down an enterprise.
5. Leadership that can hold and motivate both senior and mid-level managers.
6. Compensation programs that motivate appropriate behaviors relating to both the investor and the enterprise versus simply a participation in deal or fund pieces.
7. Enterprises that are creative and willing to diversify and grow in order to gain market share (in a declining pie, the strategy of market share is imperative).
8. The ability to bring on the best human capital that the market has to offer.
9. For many who fundamentally understand the psychology of the investor and are able to shift/diversify into controlled accounts, club accounts and related structures that require a different style of management and investor interaction. Organizations may require changes to their human capital, processes and procedures and rewards system to address such opportunities.
The game of musical chairs will be a stressful one and will result in a changed landscape, but those who understand how the game is changing and are prepared to manage an enterprise with strong practices will find a way not only to survive, but prosper.
— An Enterprise Perspective from FPL Associates
Due to the depth of the recession and complexity of issues leading to the global financial crisis, government intervention and stimulus have escalated to unprecedented levels. In addition to the Fed’s interest-rate reduction to almost zero, the government’s unconventional initiatives have helped spark market activity. These include the doubling of the Fed’s balance sheet over the past two years as result of various rescue packages and liquidity injection and programs such as Cash for Clunkers and tax credit for first-time homebuyers, which targeted trouble spots in the economy. These programs have not compensated for the unprecedented drop in consumer and business demand; however, they have worked in averting the worst-case scenario for the U.S. economy and are providing a much-needed spark to reignite economic activity. Most importantly, the “fear” psychology of the past six months and extreme risk aversion by investors has clearly shifted in the right direction.
Recent Fed statements suggest interest rates will remain low for an extended period, though sentiment could reverse if inflation were to spike unexpectedly. A rapid tightening of monetary policy could derail the recovery and result in another deep contraction (W-shaped cycle), most similar to the twin recessions in the early 1980s. Given the amount of slack in the economy today, runaway-inflation fears appear overblown, for now. There are, however, other risks that could spawn a double-dip recession, including another financial sector shock, which could set a new negative feedback loop into play. Additional risks include a wave of commercial mortgage maturities over the next several years, the prospect of a supply-induced energy shock, or the possibility of higher taxes to offset the deep fiscal deficit. These risks are well recognized at this point, however, the slack in the economy should give the Fed plenty of room to avoid measures that risk a second recessionary dip.
The sudden and deep recession would lend some expectation of a V-shape recovery, which is also supported by historical post-recession periods, the majority of which saw first-year growth rates well above long-term averages. In fact, the tremendous volume of cash on the sidelines throughout the economy points to a potential of surge in investment and spending that would normally support a V-shaped recovery scenario. However, given the depth of consumer debt, high and lingering unemployment, and corporate focus on keeping a lid on costs for some time, the real estate industry is best served to prepare for a more gradual, U-shaped recovery starting in the latter part of 2009. Given the depth of the still-lingering credit market issues, a somewhat choppy pattern should also be expected before a sustainable cycle of growth takes hold.
Hessam Nadji is the managing director, research services at Marcus & Millichap Real Estate Investment Services. Contact him at hessam.nadji@marcusmillichap.com or (925) 953-1700.
During a time when most retail markets across the region remain stagnant, Downtown Miami’s is surprisingly enjoying relative growth. An area widely recognized as the epicenter of where boom turned to bust is turning a corner, and ironically, the downturn is serving as its catalyst. As price discounting continues and demand for urban living remains high, renters and buyers are flooding the Downtown market to take advantage of the killer deals and centralized urban location, in turn, creating a built-in customer base for retail entrepreneurs to capitalize on. In July of this year, Downtown Miami’s Central Business District welcomed four new restaurants, which are the latest to come on line to cater to residents and visitors.
The four new additions – Brickell Irish Pub, Ecco Pizzateca, Mia at Biscayne, and Tré Italian Bistro – join the more than 150 new retail businesses that have opened in Downtown Miami since 2005, and another 25 are slated to open before the end of 2009. Retailers, market analysts, and real estate professionals alike cite the area’s strong commercial base; waterfront location; entertainment and cultural destinations such as The Adrienne Arsht Center for the Performing Arts and the American Airlines Arena; access to public transit; and convenience as Florida’s largest employment center as the primary driving factors behind the surge in residential and retail growth.
In fact, a recent independent Residential Closings & Occupancy Study conducted by Goodkin/Focus Real Estate Advisors in partnership with the DDA, found that more than 62% of the 80 residential buildings that have been built in Downtown Miami since 2003 are occupied by primarily full-time residents. Additionally, the average monthly sales and leasing activity of new units has been averaging approximately 400 units per month; the average monthly sales of new units during the past three months has increased over the three months prior. U.S. Census projections indicate that the Downtown area’s residential base has grown from 40,000 to 60,000 since 2000, with another 10,000 new residents expected to move in over the next six years.
It’s a cyclical evolution – the residential and commercial populations are attracting more retail and businesses to relocate to the district while the emergence of new retail and entertainment options is spurring more residential growth. In similar fashion to how Miami Beach’s Lincoln Road turned the corner in the early 90’s, we’re seeing entrepreneurs look at downtown Miami from a long-term perspective. Business owners are committed to investing in Downtown Miami today because they see the potential in the area tomorrow. And for the first time in years, landlords and property owners are doing their part by seeking out more upscale, service-oriented retailers who are committed to contributing to the area’s new landscape.
By Dr. Peter Kozel
Senior Managing Director
FirstService Williams
New York City
Mounting evidence suggests that the New York City office sector is scraping along the bottom of its cycle and laying the foundation for an improvement in operating performance. The property market itself is offering some of this evidence. Additionally, data from the economy and business sector are providing greater clarity about the dimensions of the contraction in business activity plus what are likely to be the contours of the eventual economic recovery.
Demand for office space evaporated during the first four months of 2009, with leasing volume declining to a monthly rate of just one million square feet, and much of this activity involved 5,000 square foot and 10,000 square foot transactions.
In June and July, however, leasing volume escalated to 2 million square feet in each month, roughly equal to the average monthly total in 2007. An important part of this increase stems from the substantial number of leases signed in those two months for over 50,000 square feet. From approximately mid-June to the end of July, FirstService Williams counted twenty-two lease transactions for 50,000 square feet or more including ten for 100,000 square feet or more. Undoubtedly, there were additional confidential transactions that were not reported.
Some of these large deals were completed by tenants that had been in the market looking for space since 2007. In a few cases, they were close to a deal. But, as rental rates started to decline, they decided to wait. With the average effective rent now down by close to 40% from the peak – and more in some submarkets – these firms must have decided that rents were close enough to a bottom so that a deal struck at this time will not prove to be overpriced six months from now. Additionally, their own business situations must have stabilized to the point that they can gauge how much space they would likely need and what they can carry in occupancy costs.
Since mid-May, net additions to the amount of available space has also slowed from the pace in the previous nine months, down by nearly 50%. The amount of space that is listed as available continues to increase; but what is less clear is whether or not these new listings are really newly available space. The stock of shadow space began to grow in 2008, and some of it has now been shifted to open listing.
In the Midtown North market, availability registered 14.8% at the end of the second quarter of 2009. Our reading of the data points to a peak of 16.8% by the end of 2009 and about the same at the end of 2010. Even though the New York City economy should be on the mend by early 2010 – with modest additions to employment – a little over three million square feet of newly constructed office space will be added to the inventory, keeping the availability high.
So what is the broader economy telling us? The average unemployment rate for the first six months of 2009 in New York at 8.3% remains below the national average of 8.7%. Moreover, the labor force continues to increase in New York City, while it is trending downwards for the nation as a whole.
For the past 24 months, office sector employment is down a total of 5.8% for the U.S. but only 3% for New York City. By contrast, in the 2002/2003 cycle, New York City suffered a 9% cumulative decline but just a 2.4% reduction for the nation. The consensus forecast now looks for the U.S. economy to grow by 2.5% to 3% during the third and fourth quarters of 2009. Since New York City has consistently outperformed the nation during this recession, the city should enjoy a solid bounce in the second half of 2009.
There are plenty of credit problems yet to be worked-out during the next several years. So the recovery will be bumpy. But as the partial sale of 485 Lexington Avenue by SL Green for a 6.2% cap rate indicates, confidence in the New York City office market is beginning to return.
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