Has the long, slow recovery of the commercial property market already begun? Indications are that this is indeed the case; it was the message behind NAI Global’s annual Global Market Report, released in January, and is backed up by forecasts and analysis made public recently by other real estate advisory firms.
After a rocky start to 2010, the situation for the commercial property market was looking more positive as the year drew to a close. Much of the activity in 2010 was driven by corporate space users taking advantage of a tenants’ market worldwide to lock in low effective rental rates and reduce their overall occupancy costs. Office rental rates in some markets have fallen more than 30% from their mid-2007 peak. This activity is expected to increase as economic growth returns, further unleashing significant pent-up demand, according to the NAI report.
“Although 2010 was another very challenging year for the industry, we began to see clear signs that the global economy and commercial real estate markets had stabilised and were beginning to improve with a noticeable pick-up in transaction volume around the world,” says Jeffrey M Finn, president and CEO of NAI Global. “Companies around the globe are taking advantage of the current market, extending or renegotiating leases, securing investment properties, disposing of underperforming assets and finalising plans for growth in the next 24 months. We expect a much more active market for buyers, sellers and occupiers as conditions continue to improve.”
Jones Lang LaSalle (JLL), meanwhile, reported that global direct real estate investment volumes had surged by 50% to $316bn in 2010. After reaching a low of $209bn for the full-year 2009, global direct commercial real estate volumes were bolstered by an active first half of 2010 in key markets and a general surge in fourth-quarter investment activity, says JLL. Activity in the fourth quarter of 2010 marks the first time global investment volumes have exceeded $100bn since the onset of the global financial crisis in 2007.
"At the beginning of 2010, we predicted total global volumes to land near $300bn, and the fourth quarter surpassed our estimates,” says Arthur de Haast, head of JLL’s international capital group. “Barring further sovereign debt crises or financial shocks, the momentum of 2010 is expected to continue over the next 12 months and we predict global volumes for 2011 should increase by 20% to 25%.”
Rebound in the West
The Americas and Europe, having experienced the greatest decline in total volumes in 2008 and 2009, have shown the strongest rebound.
“Of the developing markets, volumes in China and Brazil were bolstered by a surge of activity in the fourth quarter as volumes in both countries hit record levels,” adds Mr de Haast. “The US, the Nordics and Germany also experienced healthy growth in the final quarter compared with a year ago.”
In Europe, the Middle East and Africa (EMEA), which recorded the highest overall volumes of the three global regions in 2010, full-year volumes reached $136bn, up by nearly 40% on 2009 in dollar terms. Fourth-quarter volumes hit $49bn, marking the highest level since the first quarter of 2008 ($60bn) by a significant margin. Europe’s largest markets – the UK, Germany and France – made up over half of the region’s direct commercial real estate volumes, confirming the global trend of investor appetite for core products in mature and transparent markets, although there is clear evidence of investors being prepared to look further afield.
“In Europe, the Nordics, central and eastern Europe and Germany have seen the greatest increases in activity over ,” says Richard Bloxam, director of JLL’s EMEA capital markets group. “The restricted supply of core assets in Europe's major markets is driving investment demand to other cities and geographies. Additionally we are witnessing an increasing appetite from investors to step into core investments at an earlier stage of development."
US leads the charge
The global recovery – however mixed – is being led in part by the hard-hit US market. Cushman & Wakefield’s (C&W) year-end statistics for the US industrial market show leasing and investment activity increased notably in 2010, while vacancies began to decline from their peak. Leasing activity for industrial product totalled 24.97 million square metres in 2010, up 16.5% from the 21.44 million sq m leased in 2009. While leasing picked up throughout the year, the fourth quarter proved particularly strong, with 7.3 million sq m of leasing activity, up from an average of 5.87 million sq m leased during each of the three previous quarters. Twenty-three of the 34 US industrial markets tracked by Cushman & Wakefield recorded increases in leasing activity year over year.
Investor appetite for industrial real estate also rebounded during 2010, as 9.28 million sq m of property traded hands, up 64.4% from the 5.62 million sq m sold in 2009, and the highest level of industrial investment activity since 2007.
"These types of increases make it apparent that confidence is building on behalf of both users and investors," says Jim Dieter, executive vice-president and head of C&W's national industrial services. "Improvements in fundamentals provide a clear picture of recovery for the US industrial market."
The uptick in leasing activity also boded well for the absorption rate, a measure which indicates the net change in occupied space. Absorption was positive for the first time since the second quarter of 2008, ending 2010 at positive 1.21 million sq m, a major increase from the negative 11.63 million sq m in absorption at the end of 2009.
Industrial construction completions totalled 1.47 million sq m in 2010, down 74.4% from the 5.75 million sq m completed in 2009, and the lowest amount of new space added in the course of one year since Cushman & Wakefield began tracking the industrial market. New construction for the year totalled less than 1% of the current US industrial inventory of 752.5 million sq m. The previous record low for construction was 4.22 million sq m in 1995.
“Positive absorption for the first time in two-and-a-half years is an extremely positive sign for the US industrial market," says Maria Sicola, executive managing director and head of Americas research for C&W. "Historically low construction rates will keep supply limited, giving us the possibility of rent increases later this year.”
Following 10 consecutive quarters of decline, direct net asking rents for US industrial space rose slightly from the previous quarter, ending 2010 at $5.51 per square foot.