CALABASAS, CA—The term “perfect storm,” often used to describe a positive confluence of market factors in commercial real estate, actually has a negative connotation: in its original meteorological usage, it means that conditions could not possibly be worse. Using that term to describe the current market could go either way: for investors seeking high yields, it's getting to be heavy weather, but for CRE as a whole, conditions are highly favorable. That's the conclusion to be drawn from a newly issued capital markets report from Marcus & Millichap, prepared and edited by William E. Hughes, SVP, Marcus & Millichap Capital Corporation, which provides an overview as well as sector-by-sector analysis.

“Strong capital flows, from both equity and debt sources, are boosting the liquidity of the commercial real estate market and driving transaction activity,” according to MMI. “Equity capital of all stripes — from local investors and 1031 exchanges to institutions that include REITs, private equity and sovereign wealth funds — have accelerated acquisitions and portfolio repositioning to capitalize on the low cost of capital, consistent revenue streams and rising prospect for appreciation.”

Simultaneously, MMI notes that lenders have come back strong just a few years after the banking crisis. Commercial mortgages dropped by 10% at the height of the crisis but hit a new high at midyear 2014, rising by $140 billion over the past 12 months. “Commercial banks have picked up activity in both fixed- and floating-rate loans, CMBS volume is strong a second year in a row, insurance companies and government-sponsored agency lenders remain competitive and mezzanine funds abound,” the report states.

This wave of liquidity has pushed property prices to record or near-record levels in core markets and now is working its way to secondary and tertiary markets. “Property sales are increasing in nearly every metro, but investors are increasingly targeting assets in non-core markets as they pursue yields and opportunities with less fervent bidding activity,” according to MMI.

The increased liquidity, the firm says, “reflects the generally positive outlook for commercial real estate,” yet the strengthening economy has also supported momentum. “GDP has risen steadily over the past several years aside from temporary setbacks such as the polar vortex of the first quarter, and the outlook remains positive through the second half of 2014.”

Additionally, steady hiring has finally surpassed the 8.7 million jobs lost during the recession, and by year end, MMI predicts, the US economy should employ 1.7 million more people than the pre-recession peak. “Though many remain underemployed or left the labor force, the hiring trends continue to point in the right direction,” according to MMI. “This steady growth has allowed the economy to spur demand for commercial real estate” while keeping inflationary pressures to a minimum.

One factor supporting a positive interpretation of the term “perfect storm,” in terms of CRE performance, has been the slow-growth recovery. “Usually new construction comes roaring back during the recovery cycle following recessions, but incremental growth and the fresh memory of the severe recession has kept development largely in check,” MMI says. “Construction is creeping back, particularly for apartments, but it is predominantly centered in core areas of the strongest metros. Supply factors will be slower to emerge and less problematic this cycle than in past recoveries.”


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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.