"Transaction activity, even more so than you see reflected in this report, has fallen pretty much right in line with all the other product types across the board," he tells GlobeSt.com. "There's been in excess of an 80% decline for the first quarter, over first quarter 2008." According to the report, year-over-year transaction volume was down 69% in Q4 and 56% for last year as a whole.
Though Gelormini initially declares, "Volumes can't get any lower than what you see right now," he subsequently admits they just might, at least for the next few months. Later in the year, however, he expects to see activity pick up as REITs and some other large investors are forced to pare down their portfolios.
"There's a clear indication that the amount of stress is building up on certain assets across certain REITs," he says. "This is the year where, with each successive quarter, you're going to have trouble building on the debt side of assets for some landlords. We've been predicting this for awhile, and this seems like the most likely catalyst for renewed sales activity." According to the JLL report, total CMBS maturities are expected to grow from $49.1 billion this year to $81.2 billion three years from now, while commercial mortgage maturities issued by banks should increase from $234 billion to $311.5 billion.
In Gelormini's view, one of the biggest obstacles to renewed activity is the lack of certainty about pricing that has resulted from the relative paucity of transactions. "With the huge slowdown in sales activity, you have this ongoing situation as to pricing, where there's not a lot of transparency," he explains. "Nobody really knows what prices should be."
The JLL exec says the situation has been exacerbated by owners on the one hand who don't want to accept that values have fallen significantly and a group of bottom-feeder buyers on the other who hope to find fire-sale pricing. The continuing uncertainty regarding the overall economy only increases the hesitancy of both buyers and sellers to move forward.
But Gelormini believes the situation is changing. "The market is coming over to the side that there's been a very substantial repricing," he says. "We estimate there's been a rise of 200 to 250 basis points in cap rates since the market's peak in summer 2007." As the increase becomes clear to the broader market, he anticipates pricing levels will once again offer appealing investment opportunities.
Reluctance to accept the change in the financing market has also stalled sales, Gelormini adds, but he thinks investors are gradually coming to terms with the reality of higher interest rates and more stringent underwriting standards. "It appears that the new terms and standards lenders have adopted will not be lessening to any great degree. That is a huge issue. Money will be a lot more expensive than it was for the majority of this decade, but eventually investors will have no choice but to accept it," he says.
The composition of the investor pool, however, may be quite different from what it has been, Gelormini continues. "There's been a shift in power to prospective buyers that are equity sources and do not rely as much on debt," he says. "Going back for the past three or four years, the advantage went to buyers who where heavily leveraged. But from this point on, the advantage will go to those who bring a lot more of their own capital to the table."
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