|Title:||Global commercial real estate transaction volume by geographic region in dollars for 2007 to 2010, and through September 2011|
Start of full article - but without data
CRE Transaction Volume by Region, 2007-2011 YTD
2007 2008 2009 2010 2011 YTD
Americas XXX.X XXX.X XX.X XXX.X XXX.X
Europe, Middle XXX.X XXX.X XXX.X XXX.X XXX.X East, Africa
Asia Pacific XXX.X XXX.X XXX.X XXX.X XXX.X
Note: 2011 YTD represents data through September 2011
SOURCE: REAL CAPITAL ANALYTICS
Note: Table made from bar graph.
Global commercial real estate (CRE) is gradually improving despite mounting concerns over European sovereign debt, the pace of future economic expansion and a weak U.S. housing recovery.
There are several issues that will shape the outcome for commercial real estate in 2012. The top XX are:
* Macroeconomic fundamentals
* U.S. residential real estate market
* U.S. residential mortgage market
* Commercial real estate fundamentals
* Commercial real estate lending
* Commercial mortgage-backed securities (CMBS)
* Commercial real estate deal flow
* Globalization of commercial real estate
* Real estate investment trusts (REITs)
* Private equity
The U.S. economic recovery remains uncertain and uneven following the U.S. sovereign debt rating down-grade by New York-based Standard & Poor's, the Euro-zone sovereign debt crisis and the March 2011 Japanese earthquake and tsunami. This uncertainty in the outlook has driven lower consumer confidence and business expectations; consequently unemployment may remain high, and housing demand could remain muted. Continued slow macroeconomic growth will potentially stem CRE expansion, given that CRE lags the broader economy.
The third-quarter 2011 gross domestic product (GDP) growth of X percent was higher than the first-quarter 2011 increase of X.X percent. However, successive quarters of positive GDP growth remain below expectations.
With the United States on pace to add nearly X.X million jobs in 2011, unemployment is slowly improving--yet the economy still needs to add another X.X million jobs lost during the recession. In addition, approximately X million jobs per year need to be created just to keep pace with population growth.
Bottom line: The significant momentum generated within the CRE transaction markets during the first six months of 2011 began to show indications of stalling in the latter half of 2011 due to weak macroeconomic fundamentals. However, high-quality properties in major markets may provide stable, less volatile returns to investors given the current economic outlook.
U.S. residential real estate market
Housing, the major driver in prior economic recoveries, continues to be a weak link in the economy's revival from the recent recession. Key measures of the sector's health have yet to recover: Negative factors include elevated supply, weaker single-family home sales and falling home prices, all of which are occurring against the backdrop of persistently high unemployment.
U.S. home sales have declined in four of the five years since the housing bubble burst in 2006. In 2011, sales have trended lower, despite attractive home prices and low interest rates, due to tight credit standards and weak consumer confidence. Home prices continue to be impacted by an unfavorable demand-supply scenario. First-time buyers are unable to take advantage of historic low prices due to tight underwriting, whereas creditworthy buyers continue to postpone purchase decisions based on falling prices.
Bottom line: The residential real estate market continues to be a significant impediment to economic recovery in the United States. Declining home values are negatively impacting consumer confidence and spending, and lack of new-home construction activity has had a significant impact on unemployment. Until the overall housing market improves, there will be concerns about the U.S. economic outlook.
U.S. residential mortgage market
The residential mortgage market was the root cause of the subprime crisis and a major contributor to the 2008 economic recession. Further, delinquencies still hover at historic highs despite several bank and government loan-modification efforts.
To restore the market, the government has announced or considered numerous measures, such as strict underwriting standards, reorganization of the government-sponsored enterprises (GSEs) and introduction of alternate finance mechanisms (covered bonds). The market is yet to demonstrate growth, which has resulted in considerable speculation about its near-and long-term viability and impact on the U.S. economy.
Foreclosures in second-quarter 2011 fell below XXX,XXX to reach their lowest point since second-quarter 2007, according to the New York Federal Reserve Bank, as lenders slowed on new foreclosures after widespread criticism about documentation and procedures. The decline may be temporary, though, as more than X million homes are estimated to be in the foreclosure pipeline, according to an article by Kevin Wack in the September 2011 issue of American Banker, "Foreclosure-to-Rental Program Great in Theory, Tough in Practice."
In addition, mortgage defaults will potentially remain high due to sustained high unemployment. While a delay in foreclosure actions and the implementation of government initiatives such as the Home Affordable Refinance Program (HARP) will allow a subset of borrowers to avoid or delay foreclosures, analysts believe that a rising backlog of foreclosed inventory and postponement of foreclosure may prolong the difficult housing situation.
Heightened regulatory scrutiny is an outgrowth of lessons learned from the federal regulators' horizontal review of major banks and Freddie Mac and Fannie Mae, and their underwriting and foreclosure processes. Subsequent enforcement actions and consumer-protection mandates have been shaking these banks and mortgage operations to their core, prompting them to significantly rework procedures across their mortgage products' life cycle.
Bottom line: The residential mortgage market is transforming due to shifts in the regulatory environment, prolonged economic pressures and the entrance of new market participants. The residential mortgage market will continue to evolve significantly over the next few years as a result of the regulatory environment, the impact of declining home prices, foreclosure practices and troubled loan resolution.
Commercial real estate fundamentals
Despite a sluggish economic recovery, U.S. CRE fundamentals are benefiting from favorable absorption-completion dynamics. Construction activity remains at record lows; therefore, the nation's small improvement in employment is resulting in positive absorption.
There is also a gradual recovery taking place in overall rent and vacancy trends, although its magnitude varies across subsectors. The apartment and office sectors have posted the most favorable rent and vacancy trends, while retail and industrial appear to be the slowest to recover.
The apartment sector is experiencing favorable sup ply-demand dynamics, with supply at record lows. New York, Los Angeles and Washington, D.C, are among the strongest markets.
Tight underwriting standards, high foreclosure rates and stagnant income continue to favor renting and, thus, impact home-buying decisions, despite the fact that the ratio of a median-priced home's monthly principal and interest payment to apartment rent is at record lows. In fact, with improved occupancy, landlords are regaining bargaining power, which is resulting in rent growth in 2011.
Office fundamentals continued to stabilize amid a flight to quality, as vacancy levels decreased XX basis points year-over-year to XX.X percent in third-quarter 2011.
In addition, rental rates for office rose X.X percent year-over-year in third-quarter XXX X compared with a X.X percent drop in third-quarter 2010, according to CB Richard Ellis (CBRE) Econometric Advisors (CBRE EA), Boston.
However, slow job growth weakened the demand for new office space as the sector posted a net absorption of X.X million square feet in third-quarter 2011 compared with X.X million square feet in third-quarter 2010, according to CBRE-EA. The sector will likely improve in 2012 with a gradual decline in vacancy. However, rental growth is likely to remain subdued through 2014.
Industrial real estate demand benefited from improved international trade in third-quarter 2011 as supply-chain disruptions following the Japanese earth quake and tsunami subsided in third-quarter 2011. Net absorption was XX.X million square feet in third-quarter 2011 compared with X.X million square feet in third-quarter 2010, CBRE-EA reports.
Despite improved absorption, industrial availability remains high (XX.X percent in third quarter 2011), which is adding pressure on rent (X.X percent decline year-over-year in third-quarter 2011), according to CBRE-EA. Availability should benefit from low construction activity and a gradual increase in absorption of existing space. Hence, rent growth is likely to improve only in the second half of 2012.
Improvement in retail real estate fundamentals has moderated due to retailers' increased cautiousness. Some retailers have shelved expansion plans, as they are unsure about consumer spending. However, completion is at a record low, which will temper the effect of lower demand to some extent. Also, margin pressure and cautious consumer spending due to declining home prices indicate that retail sales growth momentum is potentially unsustainable in 2012--and may pressure vacancy and rents.
Bottom line: While CRE fundamentals have improved during 2011, this recovery has been more muted than many expected due to continued softness in the economy. The lack of new construction has benefited the CRE markets, especially within the apartment sector, as demand continues to outweigh supply. Fundamentals are unlikely to revert to pre-recession levels in the short term, however.