Reality Trumps Perception in New Report

The report, focusing on office building sales, comes from Encino, CA-based Marcus & Millichap Real Estate Investment Services. Its research team has found that the number of office sales is much like previous years.

One major theme of the report is investors and market-watchers need to maintain their perspective in viewing the current slowing of office building sales. It points out that the run-up in the number of sales and total dollar volume of transactions in the years preceding the current downturn far exceeded historical averages.

Alan L. Pontius, managing director of the Marcus & Millichap's National Office and Industrial Properties Group and an author of the report, says the office sector remains poised to generate more than 4,000 transactions in 2008, putting the year on par with 2004 levels and well above the average from 1995 to 2005. "Given the volatility of the capital markets, investors must separate the actual from the perceived to succeed in today's office investment climate," Pontius points out.

Pontius' report acknowledges that the commercial real estate investment market "changed dramatically in August 2007 as the fallout from the sub-prime meltdown deteriorated into a full-blown credit crisis." Pontius says there is no question that the velocity of office sales has slowed in comparison with the peak levels of 2005 to 2007 peak levels, but the lower number of sales this year does not justify the perception that "the market is dormant" that permeates the investor mindset today.

In view of the dramatic slowing of sales and the media reports regarding the slowing, many investors "have surmised that the entire market has effectively shut down," Pontius observes. The Marcus & Millichap managing director also cautions against placing too much stock in sales figures that were inflated by one-time portfolio deals and other transactions that skewed the statistics higher.

Pontius explains that those who focus on transaction dollar volume when assessing the health of the market are running up against "an artificial high tide" of sales because of unusual deals like Blackstone's purchase and subsequent reselling of the Equity Office Portfolio. His report says that the Blackstone deal, "inflated the average monthly dollar volume during the first seven months of 2007 by 27%."

The Marcus & Millichap report concedes that there is no question that the credit crisis has made financing larger transactions particularly difficult and that "velocity may constrict further in the coming months." However, the research shows "both equity and debt capital remain available for properly underwritten assets with positive cash flow."

There are large deals that have closed despite the general slowdown and the difficult capital markets conditions. The report cites the General Motors Building, between 58th and 59th streets and three additional significant office assets in New York City that Macklowe Properties sold, including the $444-million pass of 125 W. 55th St. Additionally, Deutsche Bank "appears close to selling several office assets it took back from Macklowe," the report adds.