By PHIL VOORHEES
What will a near record year in 2007 mean for 2008?
One of the ironies of the investment sale business is that as the year comes to a close and everyone is making forecasts for the year ahead, most investors are focused on everything but real estate.
Myriad distractions from the holidays, vacations and the New Year celebrations make this a notoriously slow and unpredictable time of year.
Bearing this in mind let’s see how 2007 is wrapping up compared with 2006, and see what factors will likely shape the investment market in 2008. While this article focuses on retail properties and shopping centers, many of these trends affect all property types.
In 2006, about 230 retail buildings and shopping centers valued greater than $1 million traded hands in Orange County, according to CoStar Group Inc. Of those buildings, there were 90 valued greater than $5 million.
In 2007, CoStar reported about 160 sales of retail buildings and shopping centers at more than $1 million, and 76 transactions at more than $5 million. Assuming CoStar lags in reporting by 30 to 90 days, and that December is typically a high closing month, 2007 should finish with around 180 retail sales of $1 million or more, and nearly 90 transactions of $5 million or more (year-to-date numbers were up 15%).
Not a bad year considering that many expected 2007 to be considerably slower than 2006.
Without question, low interest rates coupled with aggressive financing have been the driver for the investment market for at least the past five years. From a record low 10-year Treasury yield of 3.1% on June 9, 2003, the Treasury yield, the benchmark for most fixed-rate commercial real estate loans, has increased to as high as 5.2% in mid-June 2006 back to its present level around 4%.
At the start of the year, most analysts expected the Treasury to end 2007 at more than 5%, if not well above it. Yet, here we are in the low fours again.
So, the market should remain super hot, right? Well, maybe.
Lender spreads,the premium above the index rate at which lenders make loans,skyrocketed in July, and again just before Thanksgiving, effectively increasing the cost of money by more than 100 basis points (1%) compared with earlier in the year, despite the decreasing Treasury.
At the very least, the year ahead should prove interesting. While the strife in the debt market is forecasted to continue, (conduit commercial mortgage-backed securities issues totaling $182 billion in 2006 and $220 billion in 2007 are estimated to be just $110 billion in 2008), concerns about the larger economy should keep the 10-Year Treasury yield low.
If the Federal Reserve cuts the federal funds rate again at the end of January, and if lender spreads compress, the investment market might catch a second (or is it third?) wind as we begin 2008.
Voorhees is a senior vice president in the Newport Beach office of CB Richard Ellis.
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