GlobeSt.com: Can we assess the damage in terms of institutional sales in 2001?
Pumper: There was a drop-off in major transactions of about 60% from 2000 to 2001, and keep in mind that 2000 was not a high-water mark. The majority of office properties taken to market in 2001 were pulled off the market and refinanced by owners who elected to hold for another year or two based on significant bid/ask spreads. Just look at cities such as Denver and Dallas and Minneapolis; there was a major disconnect between buyers and sellers in the primary and secondary cities. The other thing that goes hand in hand with that is the amount of sublease space in the market.
GlobeSt.com: Who was doing the deals in 2001?
Pumper: Three types of buyers pursued class A: Domestic institutional investors--such as Teachers, JP Morgan, Lend Lease and MetLife; the European investors--TMW, coupled with the reemergence of Sunbelt and Jamestown; and the strong REITs--such as EOP, Boston Properties and TrizecHahn. The markets they were working in included Washington, DC; LA; Chicago; New York; and Boston. The institutional appetite for the San Francisco Bay Area is there, but so is some uncertainty as to when the market will come back.
GlobeSt.com: Have we bottomed out?
Pumper: There's obviously a bifurcation in property classes, and people are active again in class A assets that are 60 stories and lower. That part of the market has come back.
GlobeSt.com: What does that mean for the bid-ask spread for those assets?
Pumper: The bid/ask spread is still in place. The economy and Sept. 11 have caused sellers to become more realistic, and the cost of capital has allowed buyers to be slightly more aggressive. And they've gotten very aggressive on cap rates because many of these buildings are irreplaceable assets. If the building has long-term leases, the buyer's attitude is particularly optimistic.
GlobeSt.com: What about non-class A assets? What are their prospects?
Pumper: The next phase in this bifurcated market will be two-fold, the first being the resurgence of value-added plays in the major 24/7s, focused on sound class B with good fundamentals. I point to that area because, with 65% leverage and the lower cost of capital, it's attractive for buyers. The other phenomenon that we've seen pick up steam is among suburban office funds looking for products in cities with significant barriers to entry.
GlobeSt.com: Is it too early to call the B-resurgence a trend yet?
Pumper: Not a lot of deals have been consummated yet, but that's the area of growth that we'll see in the second half.
GlobeSt.com: You mentioned Sept 11. The growing sense is that the industry is absorbing its ill effects and it's the economy only that holds us down now. Do you agree?
Pumper: Basically, Sept. 11 stopped deal flow in both the equity and debt side. The disruption it caused has dissipated to some extent, but people are still leery that something may occur. Three months after the attack, investors are still taking that into account. For instance, there's a certain height limit beyond that many investors won't pursue; I mentioned that people are getting active again with buildings 60 stories and less. I don't know how the owners of major marquee buildings would do taking their assets to market right now.
GlobeSt.com: You mentioned that there's a bifurcation in terms of our recovery. How do you think the recovery will play out?
Pumper: I expect the second half of the year to be much stronger than the first half, and 2002 overall will shape up to be a good but not a great year. That, however, will set the tone for a potentially solid 2003.
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John Salustri
John Salustri has covered the commercial real estate industry for nearly 25 years. He was the founding editor of GlobeSt.com, and is a four-time recipient of the Excellence in Journalism award from the National Association of Real Estate Editors.
