Skip Ribbon Commands
Skip to main content

News release


Jones Lang LaSalle 3Q 11 Capital Markets Outlook:  Prime Assets Reign Supreme

“Summer of Discontent” weighs upon secondary marketplace as investors return to core

LOS ANGELES Oct. 27, 2011 — Prime assets continue to draw significant interest in the form of debt and equity capital, despite turbulence in the global financial markets and worries surrounding the Eurozone debt crisis—all of which has contributed to the “Summer of Discontent” affecting the commercial real estate sector in the third quarter of 2011. 
Jones Lang LaSalle’s 3Q Capital Markets Outlook, released today at the Urban Land Institute’s Fall Conference in Los Angeles, shows investors are beginning to pull back from further expansion on the risk continuum and secondary, tertiary and Class B assets may have to wait for further consideration until 2012.

“Moving towards the mid-part of 2011, we began to see investors shift their focus from the core, well located primary assets, where cap rates had dropped to the low 5s and 4s in the best markets, toward more secondary markets or assets with more fundamental risk,” said Jay Koster, Jones Lang LaSalle’s Americas Capital Markets President.  “However, given the recent worldwide market volatility, investors overall desire for risk has become muted and they remain very price-sensitive for any additional market or fundamental risk they are undertaking outside of those prime markets.” 

The preliminary estimate for total U.S. office volume during the third quarter is approximately $15.6 billion, representing a slight five percent increase over second quarter activity.  On a year-over-year basis, transaction activity still grew at a very strong pace at 55 percent.  This pace of year-on-year growth has slowed substantially from the triple-digit gains that were experienced in most of 2010 and early 2011 and is expected to slow even further in the fourth quarter as economic concerns linger.

Cap rates in the office sector expanded modestly in the third quarter, increasing 30 basis points to 6.4 percent.  Despite this increase, average initial yields are still 250 basis points lower than those seen in the market trough of 2009.  “As investors flocked towards the safety of U.S. Treasuries in the third quarter, yields on a 10-year note fell to their lowest levels in more than 60 years,” added Koster.  “That made nearly every sector of real estate even more attractive to a wide array of investors—and may, in fact, push demand for the highest quality assets even higher in the near-term.”

In addition to the demand in the office sector, U.S. multifamily assets continue to draw very strong interest from a broad cross-section of investors.  The sector’s market fundamentals and relatively superior availability of debt financing as compared with other product types kept multifamily volume relatively stable in the third quarter at more than $12 billion.  For the year-to-date, U.S. multifamily volume is an estimated $33 billion, up nearly 70 percent from the same period in 2010.

Commercial Real Estate Lending Markets
The debt markets were also impacted by the combination of the surge in financial market volatility over the summer as well as the reduced U.S. economic expectations.  While the short-term policy interest rate remains in a range of zero to 0.25%, and the Federal Reserve indicated during the third quarter that it would maintain the policy rate at its current exceptionally low level until 2013, both investor demand as well as loan product available for Commercial Mortgage-Backed Securities (CMBS), has been tempered over the last two months. 
The end of 2010 and the beginning of 2011 saw a strong resurgence in the CMBS market—with CMBS lenders placing loans in earnest in the first half of this year. Conduit lenders have issued nearly $10 billion in loans in the third quarter, pushing the total issuance to date to approximately $27 billion—more than double the total bond issuance in all of 2010.  However, over the second and third quarter, CMBS spreads began to widen, becoming increasingly choppy in the heat of June and July.  As a result, CMBS issuance will likely decline over the next few months, with total issuance settling in at about $30-33 billion, compared with projections of $45-50 billion earlier this year.
“The volatility we saw in the pricing for CMBS issuance in late July and early August created a great deal of inefficiencies in the system and resulted in buyer uncertainty relative to the sizing and pricing for underlying debt .   This slowdown in the CMBS market will have the greatest impact on the secondary markets and Class B product as their financing alternatives have been reduced,” said Mike Melody, Executive Managing Director and Co-Head of Jones Lang LaSalle’s Real Estate Investment Banking team. “While the CMBS players are pulling back, life companies are still investing in commercial real estate and should have as much, if not greater, allocations to the sector in 2012.” 
Life insurance companies originated the greatest percentage of office loan volume in the first half of 2011, at 29 percent.  Now that they’re nearing their planned allocations, this lender group may move at a more selective and deliberate pace in the final months of 2011.  Other major national balance sheet lender groups have also pulled back a bit in the wake of market turmoil, but only modestly—and have kept up allocations to well-located and occupied Class A/core assets.
“We’ve recently seen a number of high-quality assets with upcoming maturities be extremely successful in securing financing—notably the Trammell Crow Center $93 million refinancing and the $205 million refinancing for The Crescent, both in Dallas and financed through life companies,” said Tom Fish, Executive Managing Director and Co-Head of Jones Lang LaSalle’s Real Estate Investment Banking team.  “Strength of sponsor, tenancy, length of lease terms and location will continue to play a more crucial part in a lender’s ability to competitively quote deals and subsequently securitize in the marketplace.  We expect it to take until at least the middle of 2012 before those secondary markets and Class B properties start receiving more significant attention from lenders, as prime assets still reign supreme.”
Domestic banks and opportunity funds are shifting their attention to find yields gained in the loan sale market as the way to move product, versus the foreclosure real estate owned (REO) route. Product is now moving through note sales, as the prices these institutions are able to clear matches what they would be able to achieve if they were to foreclose, take ownership and sell as owned assets in the marketplace. The latest multi-billion opportunities in the note sale sector are drawing bank and opportunity fund attention to the capitalized note sale buyers. Banks have learned they can purchase sub- and performing loans, clear the product through active buyers and open their balance sheets for new loans. This is a major trend to clear bank exposure that’s expected to continue in 2012, and well into the “maturity wall” the industry still faces through 2016. 
Jones Lang LaSalle Capital Markets is a full-service global provider of capital solutions for real estate investors and occupiers. The firm’s in-depth local market and global investor knowledge delivers the best-in-class solutions for clients — whether a sale, financing, repositioning, advisory or recapitalization execution. In 2010 alone, Jones Lang LaSalle Capital Markets completed $43 billion in investment sale and debt and equity transactions globally. The firm’s dealmakers completed $33 billion in global investment sales and buy-side transactions, equating to nearly $140 million of investment trades completed every working day around the globe. In the United States, Jones Lang LaSalle grew its office broker volumes by 257 percent in 2010 and is quickly gaining market share across all property types. The firm’s Capital Markets team comprises approximately 800 specialists, operating in 185 major markets worldwide.

About Jones Lang LaSalle
Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2010 global revenue of more than $2.9 billion, Jones Lang LaSalle serves clients in 60 countries from more than 1,000 locations worldwide, including 185 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.8 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than $43.5 billion of assets under management. For further information, please visit our website,