In case you’re not yet numbed to bad economic news, here’s some more.
RCA Analytics has released its latest global trends report, and it concludes that global investment sales are–suprise, surprise!–tanking:
"Sales of significant commercial properties worldwide totaled $388b (€254b) through August, representing a 57% decrease compared to same period in 2007."
Nice! Even better, "The pace of transactions continues to slow and preliminary data for Q3’08 shows an even steeper decline of 64% from Q3’07."
Here are some of the report’s other conclusions:
First, we should expect a lot more properties to come on the market, either through distressed sales, or companies looking to shore up their balance sheets:
"The failure of Lehman Brothers and the government bailout of AIG may bring a multi-billion dollar flood of new offerings to the market."
"In the US, new property offerings are outpacing closed deal volume by almost 2-to-1. The first distressed sellers to emerge have been the most highly-leveraged buyers that bought at the peak of the market, such as the Macklowe sales forced by Deutsche Bank. Now, pressured sellers are increasing in number and diversity. Major retail REIT General Growth has recently announced that it may have to sell properties. Equity funds are still holding signifi cant inventories of properties they obtained via REIT privatizations and many of these are coming to market. For example, sales of properties from Archstone, one of the largest and last privatizations, have accounted for 12% of all apartment sales in the US since June.
Beyond these pressured sellers, there are initiatives by major investors to reduce overall exposure to commercial property in light of market conditions."
Retail on super-prime corridors–also known as "high street" retail–will at last begin to suffer:
"All that glitters, though… the global economic downturn, combined with the growth of US-style malls, will erode high street strength, especially on celebrated shopping streets such as Old Bond Street, Fifth Avenue or the Ginza."
And finally, what is New York and London’s loss could be Singapore and Paris’ gain:
"If investors avoid London and New York, where will they go? It wasn’t very long ago that property buyers in London and New York paid yields that were below riskfree rates afforded by government bonds. Record high rental rates in Manhattan and London seemed assured plus buyers were making double-digit assumptionsfor further rent growth. Combined, the two markets accounted for 30% of all urban office properties sold globally in 2007 with total volumeof $80b (€58b) equally split between them. Through August, office sales in London and Manhattan were off over 60% this year totaling just $12.4b (€8.1b) in Manhattan and $11.1b (€6.7b) in London. Yields on office properties in London were up approximately 100 bps to 5.9% while those in Manhattan were up just 25 bps based on closed transactions although asking yields are more in line with London, averaging 5.5%, reflecting a 75 bps increase from a year ago.
Not only has risk throughout all markets been re-priced higher, but the risk profile of the world’s two largest financial centers has also changed significantly. The financial meltdown has caused a wave of mergers and layoffs that are expected to leave millions of square feet of office space vacant and rents are already falling. Estimates of the job losses in the financial sectors in London and New York are as high as 100,000 for each city.
The reversal of fortunes for these financial centers begs the question, if not New York or London, where? Both cities have a high concentration of investors that have an international investment horizon. A number of markets throughout the world stand to gain. Already, Tokyo has risen to the top in our mid-year rankings of office property sales and many recent buyers there had also been active in London and New York.
However, Tokyo is also exposed to the financial sector and its investment prospects have dimmed as well. Emerging markets are attracting quite a bit of capital but won’t likely see much investment from buyers seeking alternatives to London and New York. Instead, these buyers are more likely to stay focused on the proven core markets they are most familiar with—especially as yields there rise.
The core markets that have a number of buyers in common with Manhattan and London are Paris, Singapore, San Francisco, Rome and Chicago. Paris may be the primary beneficiary since buyers in New York and London also spent nearly $4b (€2.5b) in the Paris market over the past year. Singapore is also well positioned to gain capital that might otherwise have been spent in London or New York. Many investors have sufficient exposure to the US and Europe already and need greater diversification throughout Asia.
