CALABASAS, CA-A lack of new supply has been a major factor in the recovery for both the office and industrial sectors, but employment growth per se has been too gradual to move the needle much on office vacancy. That’s about to start changing, said Marcus & Millichap Real Estate Investment Services’ Hessam Nadji in a webinar Tuesday. He said that “a tighter correlation” between employer hiring and leasing would become apparent beginning later this year.
“The worst of it is clearly over and we’re on a sustainable path to recovery—but it’s going to be a gradual one,” cautioned Nadji, managing director, research and advisory services at Marcus & Millichap. He cited a number of factors that are slowing down what otherwise would be an “exciting” rebound, yet even with these headwinds, “there’s a natural recovery that’s moving ahead.”
Helping drive that recovery is retail sales velocity, now up 10% from the recession trough, Nadji pointed out. And while the addition of 2.1 million private-sector jobs over the past 12 months does not represent thrilling velocity, it nonetheless has been “pretty consistent,” he said. Moreover, the hiring has been broad-based across industries, providing encouragement that employment gains will persist even amid the ongoing uncertainty of the European debt crisis and the 2012 elections.
Also broad-based has been investment sales activity across office and industrial, said William Hughes, SVP and managing director of Marcus & Millichap Capital Corp. Investors have paid attention lately to “proven assets” in smaller markets as well as core properties in primary markets, although the latter still draw the greatest buyer interest. However, for transitional properties in secondary and tertiary markets, demand remains spotty, Hughes said Tuesday.
We Also Recommend:
What has undoubtedly improved is the availability of debt. “The capital market is adequately served all along the capital stack,” said Hughes. “The reality is, there are many more lenders in the market than there were even six months ago.” There are also high hopes for new CMBS despite its disappointing showing in 2011; “everybody’s pretty aggressive right now” in their outlook for securitized lending, he added.
Dovetailing with Hughes’ discussion was the observation by Alan Pontius, SVP and managing director at Marcus & Millichap, that “we continue to have a very favorable environment for real estate transactional activity.” That’s reflected in sales velocity: the first quarter of 2012 saw 440 office transactions and 320 industrial deals, compared to Q1 ’11 tallies of 298 and 279 for office and industrial, respectively.
In line with that uptick in deals is pricing that lately has approached the market’s peak in 2006 and 2007, although Pontius acknowledged that the average is skewed upward by a bias toward higher quality stock than typically traded five or six years ago. Could volume similarly return to the highs of ’06 and ’07? “That’s a hard question to answer,” said Pontius. “But I don’t consider it impossible at all.”
One aspect of the current transaction landscape that’s moving away from the market’s peak is cap rates. The spread among cap rates for deals in primary, secondary and tertiary locations is far wider than we saw between 2004 and 2008, Pontius said. But he noted that this is a sign of a more normalized market.