Generally, buyers appear to be acting rationally and have not been overly aggressive in their underwriting. “CBD office buyers have largely been maintaining their spread relative to Treasuries while the spread has actually increased for suburban assets. Few geographic markets stand out with the exception of New York City (midtown) and the District of Columbia.
Buyer Conveyancing especially in the case of the District, buyers are willing to pay whatever the price in order to enter the market. In New York City, the appeal is less broad-based, as the weakness in the market becomes more apparent. Beyond these two markets, the key appears to be the type of asset and particularly the perceived level of risk. Pricing is not inflated for the average assets in secondary markets.
Respondents believe that prices have peaked in all markets, with the possible exception of the District of Columbia. Most respondents believe that prices will remain high as long as the economy struggles, interest rates remain low, and the stock market continues to represent a poor investment. Nearly all respondents agree that prices will drop as interest rates rise.
Many investors are betting on the fact that any decline in prices will be offset by rising rents. The ideal scenario is one where occupancies and rental rates recover more quickly than interest rates.
An investor’s revenue would increase faster than its interest expense, and property prices would continue to rise. Unfortunately, this scenario is unlikely. While the potential scenarios for the leasing markets indicate that the worst may soon be over, a recovery of rents and occupancies will likely be much more gradual than the rapid rate at which they deteriorated.
On the other hand, movements in the investment market occur much more quickly, and capital market factors will likely continue to set the pace of pricing over the near term. Even if there isn’t a bubble per se, some buyers may be at risk, e.g. the short-term investor using floating rate debt. Rising interest rates could trigger a mild wave of troubled situations for highly leveraged properties with floating rate debt.
However, much of the floating rate debt in place is capped, collared or hedged. Furthermore, many of these deals include a mezzanine lender with deep pockets to step in and protect their investment. Therefore, we see this risk as relatively minor unless interest rates rise unexpectedly quickly. For the investor with a long-term hold, utilizing fixed rate debt, the implications are minimal.
It is doubtful that there will be a mass exodus of investors when interest rates rise and alternative investments become more attractive.
Liquidation has a cost in terms of time, fees and taxes. More importantly, 1031 exchange laws offer powerful incentives to ensure capital invested in the commercial real estate industry stays in the industry.
Residential Conveyancing are addition, much of the capital that has flowed into real estate recently is not speculative but has a long-term time horizon, and investors are prepared to ride out any short cycles.
While some real estate investors may disappear when interest rates rise, the market is well positioned and currently has a diverse and deep pool of capital sources. Diversity among investors and capital sectors will contribute to the stability of the office investment market.
No one capital sector is solely responsible for driving prices. In the past, it was easier to point to a single culprit, such as the REITs in the late 90s or the Japanese in the late 80s. Office leasing activity is expected to pick up late in 2003-early 2004.
But the office market is unlikely to reach its long-term equilibrium vacancy rate of 10% until 2007, thus keeping a lid on rents for the next three years. This slow and steady recovery assumes no further external “shocks” to the national economy.
Speculation of a potential pricing bubble in the property investment market has been fueled by a surge in sales that began in the spring of 2002. Since then, the yield on the acquisitions of core property types has dropped by approximately 50 basis points, a considerable pricing swing in just a six to nine month period.
Of the four core property types, office has attracted the most concern. Record high prices for office properties have been reported in a number of markets at the same time that leasing market fundamentals – vacancies,” absorption and rents
Have continued to deteriorate. However, the degree of price appreciation varies greatly based on property and market attributes and is not a broad based phenomenon.
In the following analysis, we attempt to address the issue of whether or not a bubble exists in the office investment market, and if so, which types of office property and metropolitan markets are at the greatest risk.
The conveyancing process in Australia deterioration of the office leasing market over the past two years caught most of the industry by surprise.During the late 1990s, the story line percolating through the trade press and industry conferences was that public market scrutiny would preclude the sort of chronic overbuilding that plagued the market in the late 1990s.
And this was largely true as net absorption exceeded space completions for seven of the eight years prior to 2001.Then the technology bubble burst, sending the economy into recession beginning in March 2001. The vacancy rate doubled from 8.5 percent in 2000- Q3 to 16.9 percent in 2002-Q3, and it could rise above the prior high-water mark of 18 percent set in 1992 after the last recession.
The economy came out of the gate fast in 2002, quickly putting behind it what appeared a short and shallow recession.First quarter GDP growth was an impressive 5% – largely on the strength of the ever-spending consumer sector and continued government spending on the “war on terror then, as summer approached, the economy turned.
Issues at a handful of large companies created turmoil throughout corporate America, resulting in distrust and a crisis of confidence among investors (and the general public).Adding to this concern, in late summer, the Bush Administration escalated a showdown with Iraq, with the immediate displacement of Saddam Hussein as top priority in the fight against terror.
Faced with a corporate “crisis of confidence” and the potential for a large-scale conflict in the Mideast (set against a backdrop of continued terrorist activity overseas) the economic recovery has seemingly been put on hold.
Not surprisingly, companies remain very hesitant to add to payrolls or make major capital expenditures – including leasing space.