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News release

Chicago

Commercial Real estate investment moves in recovery mode according to Jones Lang LaSalle’s 2010 Investor Sentiment Survey

Investors primed for increased investment in 2010 and 2011


CHICAGO, Oct. 13, 2010 —The commercial real estate investment market has stepped firmly into recovery mode, according to Jones Lang LaSalle’s Fall 2010 Investor Sentiment survey. The survey included responses from more than 200 industry participants including nationwide property owners, banks, agencies, development firms, academics and professional services firm/consultants.
 
Jones Lang LaSalle conducts its Investor Sentiment survey twice a year in both the spring and fall, in conjunction with the Urban Land Institute’s national conferences. This year, Jones Lang LaSalle partnered with the Wisconsin Real Estate Alumni Association to include 170 respondents from the university’s alumni, as well as the findings from a number of ULI Fall Meeting attendees and 30 senior executives who gathered in Pinehurst, NC in September to attend Jones Lang LaSalle’s Annual Investor Sentiment Forum. Results from all three surveys have been merged to provide the largest data set of current industry sentiment, direct from the nation’s most prominent investors.
 
Investment expectations
When Jones Lang LaSalle conducted its investor sentiment analysis in spring 2010, investors felt a marked turnaround from the uncertainty that had prevailed in the market for the past two years. Then, 74 percent of respondents indicated an interest in increasing their overall investment activities in 2010 compared with 2009. Now, just six months later, the current survey confirms an even higher percentage, 85 percent, of investors plan to increase their investment in commercial real estate in the next 12 months. Of those optimistic investors, 30 percent expect to increase their investment by up to 30 percent and an additional 18 percent predict an uptick in volumes up to 20 percent. Only 15 percent expected to pull back in investment in the next 12 months. Comparatively, in 2009, the survey results indicated 30 percent predicting a drop in investment spending by up to 30 percent.

Survey question:
Do you see your investment portfolio increasing or decreasing over the next 12 months?
An overwhelming majority said volume would increase over the next year.
 
“The capital markets are recovering ahead of the market fundamentals given the wall of capital investors are interested in placing into real estate. We expect the fourth quarter of 2010 and 2011 to show impressive gains for commercial real estate trading,” said Jay Koster, Jones Lang LaSalle’s Americas Capital Markets President. “Investors are now getting more comfortable with the stability of the investment market and their risk profiles are increasing as competition remains very high on core product.  As transaction activity increases, we’ll see more investors move up the risk spectrum in the next six months.”
 
Preferred Sectors
With the expected increase in investment, investors are evaluating the strength of commercial real estate sectors differently. Respondents favor multifamily product as the top performer in the next 12 months, following by industrial, hotel, office and lastly, retail property. In the spring, hotels edged multifamily out as the favored sector in Jones Lang LaSalle’s spring survey, while the remaining three sectors held the same spots.
 
Investor Mix
With an increase in investment on the horizon, a new investor mix is expected to enter the United States commercial real estate market. Not surprisingly, most respondents, 47 percent, expected China to be the most active investor, likely buoyed by the strength of the Chinese sovereign wealth fund CIC. While it is unclear how much CIC intends to allocate to real estate, industry experts estimate CIC will invest $10 to 15 billion in commercial property in the next 18 months. German money took the second spot at 22 percent closely followed by Middle East funds capital at 20 percent. 
 
Survey question:
What do you expect to be the most active sources of international capital in the next 12 months?
Not surprisingly, most respondents expected China to be the most active foreign investor.
 
Pricing floor
Striking the right timing seems to be the challenge for investors who look to hedge their investment bets by placing capital safely into real estate. The $64,000 question in today’s market is:  have property prices finally hit the bottom for this cycle? Encouragingly, this year’s survey indicates that 40 percent said the market will hit bottom by year-end 2010. An additional 29 percent of respondents indicate a belief that prices have already hit bottom. Both sentiments are further evidence of a widespread market believe that the real estate capital markets are now in recovery mode.  The outlook for property prices to hit bottom in 2012 registered 17 percent, and only six percent see a floor hitting beyond 2012.
 
Wave of Distress
As the market recovers the expectation of a wave of distressed commercial assets hitting the market is fading. In today’s market, the greatest number of respondents expects no wave will ever hit the market (38%), followed by 31 percent who belief distressed investment opportunities will still hit in 2011.  Many investors (19%) believe that distress assets are already hitting the market and will fully manifest in late 2010. 
 
Survey question:
Will the long anticipated wave of distressed commercial assets ever hit the sales market?
The “wave” may not hit as the market continues to efficiently absorb distressed assets.
 
Comparatively, in Jones Lang LaSalle’s spring survey, 40 percent of investor surveyed thought they’d see opportunities to invest in distressed assets in 2010, while more than half of the respondents (53 percent) believed distressed asset would hit the sales market in 2011. It seems both sets of investor respondents are still looking to capture greater distress coming to the market, which may be increasingly difficult to find as the market continues to efficiently absorb assets.
 
Capital Availability: The Return of CMBS
While the debt and equity markets have opened in the last six months since Jones Lang LaSalle completed its spring survey, the availability of capital still weighs heavily on the minds of most in the commercial real estate community. The return of the commercial mortgage-backed securities market (CMBS) was tepid at best in 2010, but investors expect a healthy increase in CMBS issuance in 2010 and 2011. Most respondents expect CMBS issuance to land in the $10 to $15 billion range for full-year 2010, but expect CMBS issuance to double in 2011 to the $20 to $30 billion range.
 
Survey question:
What do you expect CMBS issuance to be in 2010 and 2011?
Most respondents said we would be in the  $10 – 15 billion range in 2010 and expected issuance to significantly increase in 2011.

“The debt markets continue to loosen as life companies and banks, as well as private capital increase their appetite for real estate investment,” said Tom Fish, executive managing director of Jones Lang LaSalle’s real estate investment banking business. “Investors are seeing an increasing amount of capital becoming available, but that is still best priced for core assets in key coastal markets. We expect the increase in CMBS issuance to improve the real estate lending environment considerably in 2011.”
 
Market Drivers and Performance Hindrances
While the market feels that the commercial real estate investment market has moved into recovery, there are still a number of factors that investors believe will pose the greatest challenges to placing capital in U.S. real estate in the next 12 months. The greatest factor weighing on the minds of investors is the lack of clarity on the economy (3%). Secondly, 25 percent of investors feel that pricing is still at a very unrealistic level, followed closely by a 20 percent concern that servicers and banks will continue sitting on assets waiting for a better market to clear their balance sheets. Another 20 percent expect limited product availability.

Survey question:
What do you expect will be the biggest challenge in placing capital in U.S. CRE in the next 12 months?
The direction of the economy remains the biggest challenge facing investors.

With a number of very real concerns on the horizon, the vast majority of respondents (47%) characterized their mood about the commercial real estate landscape and their business prospects as challenging. Twenty-nine percent had mixed feelings about their future prospects, and 15 percent remain optimistic.
 
The concern of an impending raise in interest rates is also on the forefront of investors’ minds. One of out of five respondents felt that rates would remain low, yet 40 percent said rates would start rising in 2011.

Survey question:
Where do you see interest rates going?
While one of out five felt rates would remain low, approximately 40% said rates would start rising in 2011.
 
Outlook
General investor sentiment heading into the end of 2010 is sharply higher than where it was just six months ago. With the worst of the revenue declines behind us, investors are seeing a floor in commercial real estate prices and are actively looking to place capital. While fundamentals remain pressured, the significant premium offered by commercial real estate and the return of debt capital has created an attractive environment for property investment. The multifamily, industrial and hotel markets will likely lead the recovery heading into 2011, while office will remain the most challenged property sector. Although there continues to be legitimate concerns on the direction of the economy, that should not hinder the current investment rally. Even as downside risks remain, it will take several months of negative data before investors change course. Assuming this will not be the case, look forward to a continued rebound in the commercial real estate capital markets.
 
Want more detail on market expectations? For an insider’s perspective of all the happenings at the ULI Fall Meeting in Washington, D.C. look no farther than Jones Lang LaSalle’s ULI Blog.  Sign up now to receive e-mail alerts from Jones Lang LaSalle experts on the hot topics being discussed at the conference at www.us.joneslanglasalle.com/uliblog. Jones Lang LaSalle’s executives will provide the "net-net" for many of the educational and keynote sessions, and report on the behind-the-scenes buzz. 
 
Jones Lang LaSalle will also provide a one-stop repository for the happenings at the Urban Land Institute’s 2010 Fall Meeting and Expo on its ULI Web page. On this site, you can find an insider’s perspective on one of the most well attended industry events. Review the facts, as well as the opinions, on what the opportunities and challenges are that are driving the commercial real estate recovery. Visit the site now: http://www.us.am.joneslanglasalle.com/uli.
 
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 2009 global revenue of $2.5 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.6 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 approximately $40 billion of assets under management. For further information, please visit our website, www.joneslanglasalle.com