Deals Up, Distress Down As Commercial Real Estate Optimism Builds

Momentum has grown in the commercial real estate market within the past six months causing investors to become more optimistic and more deals to get done, according to Deloitte & Touche’s Bob O’Brien, vice chairman and U.S. real estate services leader.

“We are seeing some bright spots and people are no longing talking about the other shoe dropping,” he said.

During Deloitte’s recent webcast, “Commercial Real Estate Outlook: Is There Cause for Optimism?,” O’Brien noted that commercial real estate transaction volume rose 124.3 percent in 2010 compared to 2009 ($122.7 billion compared to $54.7 billion).

That momentum has continued throughout the first quarter of 2011 as transaction volume increased 69.5 percent to $30.5 billion, compared to activity in the first quarter of 2010. In addition, Deloitte said that transactions in major metro markets like New York, Washington and Los Angeles, grew increasingly larger due to investor’s flight to quality.

The numbers of new distressed properties coming on the market is also slowing, thanks to stabilizing fundamentals and better refinancing conditions. Data from Deloitte showed that distressed additions declined by 57 percent year-over-year to $3.9 billion in March.

“The decrease was significant and the takeaway from this, and what I’m seeing in the marketplace, is that the distressed markets may be bottoming out which may be a good thing. The recovery has to start somewhere,” said Mark Diamond, partner in M & A Transaction Services at Deloitte Tax LLP.

However, there is still time for investors to take advantage of distressed properties with Deloitte noting that there are still $142.2 billion of troubled assets remaining on the market. Diamond said that distressed properties are also driving the majority of the merger and acquisition deals.

“There is still a lot of distress out there but it also shows the increase is flattening out,” said Diamond, adding that he expects that trend to continue.

REITs on a Roll

Listed REITs have continued to be at the forefront of the commercial real estate recovery. That is in large part due to the amount of capital REITs have been able to raise. Deloitte noted that REITs raised $34 million in 2009 and far exceeded that last year, raising $47 billion in 2010. The trend shows no sign of slowing down as REITs raises $23.2 million in the first quarter of 2011, a 123.1 percent increase from the same period a year ago..

“Directionally it’s a big number, the REIT market is continuing to increase fundraising activity and is doing so successfully,” Diamond said.

A REIT rebound is underway and the sector’s performance since the recession shows that, according to Matt Kemmel, principal and U.S. Real Estate Service Leader at Deloitte Financial Advisory Services, LLP.

“Investors believe there’s greater confidence in the REIT format than other real estate investment options,” Kemmel said.

Deloitte attributes this to the fact that investors realize that REITs took on less debt and have positioned their balance sheets to take advantage of developing commercial real estate opportunities. REITs have also been outperforming competing asset classes, according to Deloitte, making them more appealing to investors interested in investing in any potential rebound in the commercial real estate industry.



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