Caplan Predicts Level Investment Field

NEW YORK CITY-Two figures in the third-quarter market report from Jones Lang LaSalle’s New York capital markets group tell the story of the investment sales market: for the first nine months of 2010, US volume was down 84% on an annualized basis from the 2007 peak of $503 billion. During that same time period, volume was up 180% from January through September of 2009. While “we’re still pretty low relative to historical activity,” JLL’s Jon Caplan tells GlobeSt.com he sees volume picking up into 2011 and New York City in particular is benefiting from the momentum.

As the market’s pace increases from a crawl to at least a trot after nearly stopping in its tracks last year, a series of pie charts show what has happened to the investor profile since ’07. Private capital accounted for 56% of the $48.5 billion in New York City property sales worth at least $10 million in ’07; REITs came in second. Last year, trusts didn’t even show up in the chart; thus far this year, they’ve garnered nearly one-quarter of the $7.5-billion volume of closed sales.

Private capital’s share this year, while still the largest at 44%, is smaller than ’07. Caplan cautions that likening the investor profiles of ’07 and ’10 isn’t an apples-to-apples comparison, due to the much smaller tallies seen since the market peaked.

“The data after 2007 needs to be taken with a grain of salt because of fewer transactions; a few deals will skew the numbers,” says Caplan, vice chairman with JLL’s capital markets group, a title he shares with partners Richard Baxter, Yoron Cohen and Scott Latham. “But going forward, the playing field is a little more level in terms of private capital.”

During the boom years, private capital applied much more leverage than foreign buyers or institutions such as pension funds and REITs, and garnered more deals, he points out. “Given the more conservative lending environment, there’s now a greater opportunity for institutional and foreign buyers to participate.”

For some foreign buyers, New York’s rapid-bid style, with non-contingent offers, represents a challenge, Caplan says. On the other hand, the REITs that are active in New York are “pretty savvy and understand the process.”

On why New York commercial property sales, in particular office, have rebounded a strongly as they have, Caplan offers, “Compared to the rest of the country, the fundamentals in New York have been more resilient than most places. New York lost a smaller percentage of jobs than the rest of the country.”

Another factor is the loss of millions of square feet of office space over the past decade, due both to 9/11 and to residential conversions. The office vacancy rate never went as high as was expected, and since the fourth quarter of 2009, “we’ve seen tenants change their strategies.” Prior to that time, as leases expired, tenants tended to look at short-term solutions. Now, Caplan says, they’re focused on locking in long-term deals to take advantage of favorable leasing economics.

Asking rents have stabilized in certain pockets, and net effective rents are on the rise as landlords cut back on tenant improvement allowances. “There’s a lot of confidence in our market,” Caplan says. Added to which, New York is very much in favor with foreign capital.

However, says Caplan, perhaps the primary factor in the percentage increase of investment activity compared to last year has been “the availability of product. In early ‘09, you had a lot of investors circling the market waiting for the right time to deploy capital. The biggest challenge was that there were so few properties available.”

There’s still more demand than product, but inventory has picked up this year. “Last year, there were only a handful of deals above the $100-million mark, and those were initiated by lenders or owner-occupants raising capital,” Caplan points out. “This year you’ve seen more investors bringing properties to market.”

Also helping are the attractively low interest rates, he adds. The greater availability of financing is a plus too, at least for core properties, where lenders are frequently in competition.

Asked whether he sees a mini-bubble, Caplan says, “Sometimes we see prices pushed up by competition. But when you compare real estate deals to Treasuries or what you earn at the bank, those returns look pretty good.”