Looking Ahead in Commercial Real Estate Markets

The disasters suffered by the residential real estate market are well known, but how did the shockwaves impact commercial real estate?

Two panelists gave their assessments at the 56th Annual Management Conference May 16 at Gleacher Center — Bruce Cohen, CEO of Wrightwood Capital, looking at the domestic market, and Jacques Gordon, global strategist for LaSalle Investment Management, covering the international scene.

Cohen took his listeners back to last July, when two of Bear Stearns’s hedge funds filed for bankruptcy, and to October, when Citigroup Inc. was hit by a credit loss of $6.2 billion and UBS, $3.4 billion.

“What’s the relevancy to commercial real estate?” he asked. “You couldn’t sell bonds. There was massive growth in liquidity.” The result was a 71 percent drop in transactions for the first quarter of 2008 from the same period a year ago.

“There are few lenders,” Cohen said. “Buyers and sellers can’t agree on what today’s value is.”

On the positive side, equity capital remains abundant, property fundamentals are relatively strong, and interest rates are low. “A lot more capital is coming into this sector, and I think it will continue,” he said. “Delinquency in bankruptcy in commercial real estate is zero.”

Cohen identified potential pitfalls as further deterioration of the economy, bank failures due to losses on loans, and regulatory overreaction. “Exogenous shock” — from war or a 9/11-type incident — also could be a factor. “The system is so fragile, it doesn’t take a lot to dismantle it,” he said.

Real estate remains strongly attractive to investors. It returns 7 to 8 percent, compared with 3 percent elsewhere. Cohen said investors are being told that commercial real estate should be up to 20 percent of their assets.

He foresees increased activity by the end of the year.

Gordon said, “There’s a broader world out there, and this broader world is a place to be looking.” The U.S. real estate market is going to be “totally clogged up” in the next 12 to 24 months, unlike the international market, he said. “But how do you get access to international real estate if you haven’t paid off the bureaucrats and don’t know a thug with a flak jacket in Moscow?”

Gordon advised looking at countries where information is scarce, capital markets are inefficient, and assets are underperforming — for example, China, India, Korea, and Indonesia.

A rising middle class in emerging markets there, and in Brazil and Mexico, makes a big difference. In India, 350 shopping malls are under construction, Gordon said.

Challenges to investing overseas include finding trustworthy local partners/operators, currency and political problems, lower transparency, lack of global benchmarks, and communicating across time zones and cultures.

Moderating the panel was Joseph Pagliari Jr., clinical professor of real estate.

—Gary Wisby