As the commercial real estate industry slowly churns along the bottom of the current cycle, LoopNet members offer mixed perspectives on the market’s near-term future. According to the results of our latest LoopNet Pulse Poll, completed by 1500 LoopNet members in January, just under half of LoopNet members expect a recovery in transaction volumes in 2010, while a substantial number are expecting to wait until 2012. Prices are expected to continue falling, while access to capital continues to be cited as the most important barrier to a recovery. Running slightly counter to these overall trends, 60% of investors are personally expecting to make at least one purchase within six months.
The survey revealed divergent opinions regarding the timing of a recovery in transaction volumes. While just over 45% believe that year-over-year growth will resume by the end of 2010 (including a small number that believe it has already begun), a substantial 20% are expecting it to be delayed until 2012 or later. With 35% predicting a 2011 recovery, this nets out to a majority of 55% who are not expecting a recovery this year.
When cut by role, investors are slightly more pessimistic, with a median expectation of year-over-year recovery timing that is approximately one quarter later than that of brokers or owners.
We view these results as an interesting complement to recent data from Real Capital Analytics, which showed a material 40% increase in transaction volume in Q4 2009 vs. Q3 2009. Although Q4 was still down 24% vs. the prior year, it marked a substantial improvement from the 65% year-over-year decline seen, on average, during the first three quarters of 2009, and was the smallest year-to-year decline recorded since Q4 2007.
Consistent with our Q4 2009 Pulse Poll, access to debt financing remains the most significant obstacle to completing transactions, chosen by half (49%) as the #1 reason, followed by high asking prices (25%) and insufficient equity capital among buyers (18%).
While debt financing was the top choice for all 3 groups, the relative weighting varied by role. For Brokers and Owners, lack of access to debt financing was over twice as important as asking prices in explaining the dearth of transactions, while Investors rated pricing as almost equally important.
While the three groups may differ on the importance of pricing as an obstacle to a recovery, all agree that prices will continue to fall, and by a similar amount. Investors are predicting the largest decline, with an average of 13%, but they are not much more bearish than owners, who are forecasting around 10%.
It is true, however, that there is a far larger segment of owners (21%) who believe prices have already reached their lows, as compared to investors (9%) and brokers (8%).
Another interesting finding in the pricing data is that, despite the declines in pricing seen over the past year, respondents’ expectations for future pricing declines remain almost unchanged. In two prior surveys, run in July and October of 2009, the respondents expected prices to fall a further 14%. In the current survey, the number has declined only slightly to 12%
Comparing these forecasted declines to observed price changes in the market, the Moody’s/REAL Commercial Property Price Index shows a decline from a level of 1.18 in July to 1.08 in October, 2009. This represents an 8% reduction—less than the decline expected by survey respondents, but still significant. The fact that this has not resulted in a marked change in expectations for further declines suggests that pressure on pricing may remain.
Pricing vs. Transaction Volumes
With future declines in pricing likely to help re-start transactions, it stands to reason that survey respondents believe the recovery in the number of completed deals will lag the low point in pricing. Over 60% believe that prices will hit bottom in 2010, compared to 45% who expect to see increases in transaction volume during this year. At the same time, 11% expect prices to hit their lows in 2012, whereas 20% expect volumes to remain depressed until then.
This could suggest that buyers will wait to see a period of stable pricing before re-entering the market. Interestingly, the Moody’s/REAL CPPI registered a slight uptick in pricing in November. Could a change in actual pricing trigger a change in market sentiment about transaction levels?
Personal Deal Activity
Perhaps signaling a healthy renewal of appetite among interested principals, nearly half of respondents are expecting to complete at least one sale and one purchase of a commercial property in the next six months. Investors bias heavily in favor of purchasing properties, with nearly 60% expecting to buy and only 20% expecting to sell. Owners anticipate less activity, and are more evenly balanced between buying and selling. Brokers, who were asked about activity on behalf of clients, are predicting more sales than purchases.
When do you expect commercial real estate transactions to recover? What are you seeing in your local market? Let us know.