CBRE's new report, "Global Insight," says that thus far the biggest impact on commercial real estate from the economic downturn has been that transaction volume has slowed "dramatically over the past four quarters." While investment activity is off in every part of the world, "the decline is most severe in the Americas, especially in the US," notes the report, co-authored by Raymond Torto, global chief economist for CBRE, and Nick Axford, head of EMEA Research & Consulting.
It is stressed in the new study that some conclusions don't necessarily apply to the whole market. It is pointed out that, in the current market environment, most properties selling right now are better-quality assets, which tend to sell at lower cap rates and higher prices, which doesn't necessarily reflect what is going on the general market--where the trend is toward lower prices and higher cap rates.
Nonetheless, the report says, property owners may fare well in the coming years as leases roll over. Even in a slowing economy, tenants will find that their existing rents are below market and will face a rising rents. That will mean "property owners will see increased net operating income," the authors conclude.
The CBRE report compares and contrasts the effect of the economic slowing on building sales both in the US and Europe. On both sides of the Atlantic, the authors say, there is a "substantial gap" between what sellers are asking and buyers are willing to pay. The present bid-ask gap continues because "sellers do not feel a need to adjust their asking price since they have little desire to sell into this environment," they explain.
Another factor that keeps sellers from dropping prices is that the cash flows on most quality properties are holding steady because occupancies remain high and a high proportion of tenants are in leases that will not roll over for quite some time, at which time market rents may be on the rise again. Only owners with debt distress--debt rolling on properties whose incomes cannot meet some kind of restructuring--are in situations where they may be forced to sell or restructure as the only solution, according to the report.
Torto and Axford point out that the conclusions are generalizations, with some specific markets in both the US and Europe likely to perform better and others worse in the changing economy. "Some markets, particularly in the Midwest, are suffering from the auto industry's woes, and markets that were heavily driven by local housing-market expansion, particularly on the West Coast and Florida, are now being negatively impacted by the contraction of single-family home prices and weakened economies," they write. In Europe, the UK, Spain and Ireland are the most exposed to the weakening residential market, they conclude.
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