JLL Report: Cautious Optimism for 2010

The firm's January Global Market Perspective contends that we have reached or are near the bottom -- but that a slow recovery is at hand.

January 26, 2009
By Allison Landa, News Editor

The year 2010 will bring some sweetness and some bitterness to the table, according to Jones Lang La Salle’s January Global Market Perspective.

According to the report, international real estate markets are showing more a more orderly, thoughtful approach to business, influenced by caution that remains from last year’s turmoil.

“The biggest change versus a year ago was that people didn’t know where the bottom was going to be. There was so much irrational fear,” Jones Lang LaSalle managing director of Los Angeles brokerage Whitley Collins told CPE. “I think everybody now feels like if the bottom is not behind us, we may be in it, or it’s ahead of us soon, but it’s not much further down.”

However, Collins cautioned that there is a flip side to the cautious optimism seen in the current market: There isn’t a lot of fast growth on the horizon. That slow recovery is due to a number of factors, including a stubborn national unemployment rate that continues to hold steady at 10 percent.

On the occupancy side, Collins forecasts a very gradual recovery with one to two years before empty space on the market will begin to be absorbed. That’s due to what he calls “shadow space”: the amount of empty space that is not on the market. Since not every lost job translated into space made available for lease, that means that many firms are sitting on empty square footage – and that will need to be absorbed before vacancy rates can begin to go down.

“If nine out of ten companies have cut back (on employees), I bet you only one of those nine has really put back space on the market … so if you go forward, they’ll have to absorb the space that’s now empty,” Collins said. “Things are starting to stabilize, the bottom is upon us, but the road to recovery is going to be a long one, especially on the office side because we have so much space to absorb before they’ll take new space.”

He said his rule of thumb is to add three to five percent to the national office vacancy rate. Since that vacancy rate hit a 15-year high at 17 percent during Q4 2009, by Collins’ estimates the true U.S. vacancy rate could be anywhere from 20 to 23 percent.

According to the JLL forecast, corporate occupier conditions have improved. That said, absorption of office space is expected to lag behind the general pace of economic recovery with the exception of markets such as Singapore, Beijing, and some Indian cities that are facing a large supply pipeline. Regional office markets are expected to turn the corner by the end of this year and return to normal growth trends in 2011.

On the sales side, Collins said last year’s activity was at a standstill, providing positive fallout for this year as there now are plenty of interested parties. While lenders are still cautious, he said that vulture funds and opportunistic funds are looking to take advantage of the fact that commercial real estate values have dipped.

“Last year was the least amount of sales volume in the last twenty years,” he said. “Nobody did anything and there was a lot of reasons for that: the fear, but also there wasn’t money out there. No one wanted to take a chance. No one wanted to lend and no one wanted to invest. In this economy, as we enter 2010, we now see a lot of money on the sidelines that’s ready to buy.”

The report’s cautious optimism extended to the beleaguered commercial-backed mortgage securities market, which was found to be making a comeback in the United States and more strongly in Europe. Despite nervous attitudes on the part of many existing bondholders, the forecast said this year is just the beginning for the European CBMS market – and, one may assume, for its U.S. counterpart as well.

Life insurance companies and REITs were also pointed out as bright spots in 2010. The former are expected to be major debt lenders, while global REIT equity prices have rebounded by more than 100 percent since their lows in March 2009. In terms of market capitalization, the report notes, the top ten U.S. REITs boast more cash on hand and availability under credit lines than they had at the top of the market.

“Now that the problems have largely been quantified,” the report says, “the search for solutions is on.”