Recovery in FIRE markets?

On a recent trip to New York, I had the opportunity to have a conversation with Deidre Bolton of Bloomberg Television about Colliers’ outlook on commercial real estate.

One of the major trends we touched on is the unevenness of the office market recovery. Colliers Research has observed for over a year that the strongest performers (in terms of job creation and office vacancy rates) have been what we call “ICEE” markets: those with an employment profile that strongly favors intellectual capital, energy and education, rather than markets traditionally associated with “FIRE” (financial, insurance and real estate) employment.

Recently, we've started to see the traditional FIRE markets catching up: FIRE absorption climbed to 73% of the ICEE total, up from 44% in 1H 2013; this counter-trend is supported in the October employment numbers.

But a closer look reveals an interesting fact: Most of the absorption in FIRE markets comes from submarkets with an ICEE profile. Submarkets such as West Los Angeles, New York – Midtown South, Chandler, AZ, and even Downtown Las Vegas are notable clusters of technology employment. Several Atlanta submarkets, allied with top universities and research institutions, are part of Atlanta’s transition from FIRE to ICEE.

The newly released North American Office Highlights report will takes a deeper dive into this topic, and includes a list of key submarkets to watch that are outperforming (or are poised to outperform) the metro areas in which they’re located.

What's driving cap rate compression?

After a recent client event in New York, I spent some time discussing the markets with KC Conway, chief economist in the U.S. for Colliers. It turns out we’re hearing the same question come up pretty frequently: What’s going on with cap rate compression? (KC has been having similar conversations regarding cap rates with bank regulators.)

Over the past 24 months, U.S. capitalization rates for all income-producing property types have declined to levels never seen before. Rate compression has been most pronounced in multifamily and credit-tenant, net-leased properties, where rates have dipped below 4.0%. Cap rate compression has been slower to occur in industrial real estate; however, that’s changing rapidly as investors rotate out of multifamily, and look to invest in the re-making of America’s supply-chain in response to growth in e-commerce and the Panama Canal expansion.

The Historical Perspective

As this graphic shows, we’re clearly in uncharted waters. The long-term average cap rate between 1965 and 2010 was 9.5%. After dropping to nearly 6.0% prior to the onset of the 2007-2009 financial crisis, cap rates rose sharply between 2008 and 2010 to 8.5%. This increase, around 200 basis points, eliminated approximately 25 percent of commercial real estate values. During the recession, increasing vacancy rates and declining rents caused another 20 percent decline in values, as indicated by the Moody’s Commercial Property Price Index (CPPI).

Source: American Council of Life Insurers.

All told, roughly 45 percent of the value of commercial real estate was wiped out from 2008 to 2010. But less than three years after the “Great Recession,” commercial real estate values have rebounded. Institutional capital and commercial real estate investors are pursuing income-producing real estate again, and have bid average cap rates to a new historic low: under 6%. Why; and what is behind this trend?

Many ascribe the trend to institutional investors’ ongoing search for yield, but of equal import is investor anxiety over Federal Reserve monetary policy aimed at devaluing the U.S. dollar and re-inflating asset prices out of the risk curve. With a 10-Year Treasury yield around 1.8% and inflation near 2%, commercial real estate certainly seems more attractive--even at a historically low 4% to 5% cap rate.

What about equities or stocks? Here commercial real estate is increasingly attractive because of its relative stability. With most major U.S. stock indices at near-record highs, and the volatility in electronic trading that can move equity prices by as much as 5% in a single day, commercial real estate is a consistent way to attain cash-on-cash yield above 4% (and as high as 7% or 7.5% in secondary markets) without the daily fluctuation in asset price.

But there could be more to this trend than just a search for yield. The approaching retirement of millions of baby-boomers may see investor goals shift toward cash flow and dividends, and away from long-term asset appreciation. Certainly low interest rates have also been a factor. Would multifamily cap rates be in the 4-5% range without cheap Freddie Mac and Fannie Mae debt? 

The question is whether cap rates must necessarily spike as interest rates rise. With so much capital on the sidelines waiting to be invested, could the conventional wisdom of overleveraging--because equity is expensive and debt is cheap--be turned upside down in the next five years? 

Investing from the Ashes

Yesterday I had the opportunity to appear on a very interesting panel at the Bloomberg Commercial Real Estate Conference: “Investing from the Ashes: The Distressed Market.”

The panel examined the investment outlook and areas of both risk and opportunity in distressed real estate. Representing the viewpoint of special servicers was Robert Lieber of C-III Capital, while Billy Macklowe offered the owner’s perspective, focused particularly in New York City.

As was mentioned on the panel, right now the outlook for distress is a mixed bag: We’re at a four-year low for new distress, but there are signs that 2013 volume will increase. CMBS loans remain the largest share of outstanding distress, and there’s another major wave of delinquency in the future as the 10-year loans from 2005-7 mature.

We see the next generation of opportunity is in secondary markets, where population growth and fundamentals (housing, job growth, etc.) are starting to rebound. In some cases like Tampa and Memphis, these markets are early beneficiaries of the shift in global trade patterns and changes in our logistics network in anticipation of the 2015 Panama Canal expansion. We also see industrial property as a stable asset class, with the least exposure from CMBS distress.

From our perspective, the greatest market risk is from interest rate sensitivity. A rise of 200 basis points in interest rates over the next two years—below the long-term trend—could, by our estimation, potentially add 20 to 25 percent new distress to the market. The hope, of course, is that interest rates would be rising in response to other positives in the economy as a whole, but it’s nonetheless a major risk for investors in the distressed space.

I very much enjoyed the opportunity to participate, and hear the perspectives of our peers in the market. Thanks to Beth Jinks and Bloomberg News for making it possible.

Here is a link to the video: http://bloom.bg/PShonm

Colliers International again ranks among IAOP’s Top 100 Global Outsourcing Companies—and we’re the only commercial real estate firm to make the list for seven years running

All of us at Colliers are extremely pleased to be included among the leading outsourcing service firms worldwide—and for the seventh year in a row! The International Association of Outsourcing Professionals (IAOP) ranked Colliers #21 in its annual list of Top 100 Global Outsourcing Companies. Thanks to our enterprising spirit and shared sense of initiative, Colliers is the only commercial real estate firm to be included on the list year over year since 2006.

What makes this designation especially gratifying is that IAOP specifically noted that customer references were one of our major strengths. Delivering service excellence is part of our mission and what distinguishes us as a global leader. Clients who are impressed with our service—and who are most likely to refer us to other clients—are critical to our success and are helping drive Colliers business growth in the U.S. and around the world.

In addition to customer references, IAOP used three other criteria to determine the rankings, including size and growth, organizational competencies and management capabilities. Colliers was also included on several sub lists, demonstrating our leadership in multiple areas including Number of Centers Worldwide, Companies with the Most Company Presence, Best Corporate Social Responsibility in Outsourcing, Leaders-Services Industry, Leaders-Corporate Services, Leaders-Real Estate & Capital Asset Management Services.

All of the companies on the list were featured in a special advertising section in the July 23 Global 500 issue of Fortune magazine, with more details on the companies, ranking and selection process. Congratulations to all of the Colliers professionals who are consistently working to exceed client expectations and keep our organization at the top.

Giving Back to the National Leadership Academy

Are leaders born or made? I believe it’s a little bit of both. While many people have some leadership qualities to build upon—whether it’s great communication skills, the ability to inspire others, or a steady hand under adversity and unexpected challenges—most develop these traits over many years and through many experiences. 

I also believe that leadership is best fostered with early training and exposure to mentors and role models. The founder and staff at the National Leadership Academy share my viewpoint. I was both pleased and honored when the group recently asked me to participate in a panel led by one of the leading innovators and entrepreneurs in education, Kristina Scala, and also featuring Jodi Rolland, who is one of the highest-ranking female executives on Wall Street with Bank of America Merrill Lynch. Kristina’s theme for the panel was “The world is run by those who show up and hustle,” and she asked the panelists to share their experiences and personal stories along this theme. 

The National Leadership Academy provides intensive, hands-on leadership and service training to high school students from around the country in an annual four-day camp in Denver, Colo. The academy, part of the Spaulding Leadership Institute, is a nonprofit youth leadership development organization founded in 2000 by Tommy Spaulding, a world-renowned speaker on leadership and author of a best-selling book, “It’s Not Just Who You Know.” (If you attended the Colliers National Meeting last year in Chicago, you will remember him as our engaging and passionate keynote speaker.)

Every year, high school students and recent graduates apply to the academy and those selected get the chance to meet with young leaders from around the country, hear from leadership experts, engage in their own mountain leadership experience and spend time serving the local community. 

Spaulding started the academy to provide the life skills—leadership, volunteering, civic involvement—he felt students needed, but weren’t getting before they graduated high school. In addition to leadership and influence, some of the topics covered in the academy are communication, teamwork, time management, interpersonal relationships, assertiveness, self-confidence, empathy and humility. The academy’s vision “… is to create civic and service-minded high school students by developing their leadership skills, inspiring purpose, and empowering them to make a difference.”

Students who attend the academy often report that the training is life-changing and that they have more confidence, motivation, self-esteem and an increased ability to create connections with others.

 ‘Community’ is one of the four core values at Colliers and we encourage everyone to live out these values and ‘walk the ‘talk.’ Reaching out to help educate and inspire young people was an especially rewarding way for me to give back—especially when it encourages kids to become more community-minded themselves. I was happy to contribute my time and my own leadership experiences to this worthwhile organization that has trained so many future leaders who will go on to make a real difference in the world.

Crowdsourcing and commercial real estate

Crowdsourcing is a practice that is becoming more mainstream and used more frequently by all kinds of companies. It’s a fascinating concept that’s developed as we’ve become a more global, connected and seamless marketplace.  If you’re not familiar with the term, crowdsourcing is a way to reach out to the masses or specific communities online (the crowd) to outsource tasks typically performed by an employee or employees on staff or to tap resources not available to companies via traditional labor resource models.
Tapping into the collective wisdom of the crowd can be a more efficient and sometimes more economic way to get things done. One of the most common examples of crowdsourcing is Wikipedia, where users share their expertise and make continual updates to the vast online encyclopedic resource.

In addition to crowdsourcing labor, organizations are using it to generate new creative ideas in the way of logo or naming contests. For example, Pepsi used crowdsourcing in 2007 to ask consumers to design a new look for the Pepsi can in exchange for a $10,000 prize. Others use it to generate donations for a good cause or to support innovation. Researchers and game designers at the University of Washington developed Foldit, an online game that uses crowdsourcing to ‘solve puzzles for science.’ A group of video gamers helped them discover the structure of an enzyme used by retroviruses similar to HIV. It was a major research breakthrough and one that biochemists had not been able to solve for years.

Several new companies help their clients access a crowdsourcing platform. San Francisco-based CrowdFlower found its niche by providing companies with data clean up via crowdsourcing. The ‘crowd’ handles simple tasks such as matching business names with addresses. The company has had more than 2 million people around the world work for them. They’re able to provide an inexpensive labor pool that can ramp up quickly to manage a large volume of work. A few other firms that offer access to crowdsourcing are Amazon’s Mechanical Turk and Clickworker.com.

I recently read about a small startup in our industry using crowdsourcing to connect developers with the local community. Through its website, popularize.com, the company enables developers and property owners in Washington, D.C., to take the pulse of the local community and deliver the kinds of companies and services local residents want. They post large-scale signs on empty building exteriors asking, “What would you like to see here?” Users log onto the website, find buildings in their area and then provide input. Then, it’s up to developers and property owners to determine the economic viability of the suggestions. The company is scheduled to launch a new platform that will allow users to directly invest in buildings listed on the Popularise site.

Tapping into the opinions and expertise of the crowd has huge potential as a way to get fresh perspectives on complex challenges, get access to talent around the world or get new ideas to develop or market products. The question for Colliers and for our industry is: Can we leverage the wisdom of our global organizations, with the vast knowledge and expertise, in new and unique ways to take real estate services to higher levels of professional excellence? I welcome the challenge in exploring this idea and I welcome your feedback on how you see crowdsourcing impacting our industry.

A Look Back at Everyone Gives | 2012

Everyone Gives has just released final numbers from the first global social giving campaign of its kind last month, and they’re really something for all participants to be proud of.

Here’s the data from a little over two weeks:

•           More than 12,000 donors
•           …in 474 cities
•           …across 64 countries
•           …raised over $740,000
•           …for 1,479 charities around the world.

100% of all donations went directly to their intended beneficiaries, which ranged from well-known international non-profits to small local and community charities. Thanks to all who participated in this year’s event, whether by donating, promoting, organizing or mobilizing.

We’re already making plans for Everyone Gives in 2013; you can keep up with the latest developments through Facebook, Twitter and LinkedIn. But you don’t need to wait until then to donate. (You can review the full list of Everyone Gives charitable partners here.)

The public support that this Everyone Gives received from across the world makes clear is that the spirit of giving is alive and well. The capacity of social philanthropy campaigns to amplify that common desire to do good in the world is truly awe-inspiring, and I believe we’ve only seen the beginning.