It wasn’t that long ago the commercial real estate sector was down in the dumps, knocked for a loop by the global financial crisis. Maybe you remember some of these headlines:
2009: A Terrible Year for the Record Books (Real Capital Analytics)
For those who thought 2008 was a terrible year in the annals of U.S. commercial property investing — and who didn’t think so? — 2009’s results put a surprising glow on such bleak memories. With $51.9 billion in investment sales showing a 64 percent retreat from 2008’s $146 billion — and a 90 percent plunge from 2007’s $522 billion — 2009 limped ingloriously out of sight.
U.S. Apartment Vacancy Rate Hits 30-Year High (Reis Inc.)
The U.S. apartment vacancy rate rose to an almost 30-year high of 8 percent in the fourth quarter, and rents dropped in the biggest one-year slump in 2009, according to real estate research company Reis Inc. For 2009 asking rents fell 2.3 percent, also the largest decline in 30 years.
Office Vacancy Rate Hits 16-Year High (Reis Inc.)
The U.S. office vacancy rate rose to 17.2 percent, a level unseen since 1994, as the market lost about 11.6 million net square feet of occupied space during the first quarter [2010], according to a report by real estate research firm Reis Inc.
California Pension Funds Get Burned Again on Real Estate (Sacramento Bee)
CalPERS’ real estate portfolio lost 47 percent of its value in a year’s time and was valued at $13.7 billion at the end of January [2010]. CalSTRS’ real estate holdings declined by 38 percent in the 12 months ending last June 30, [2009] falling to $13 billion.
Trying Times for Investors and Fundraisers (Institutional Real Estate, Inc.)
Dogged by previous overleveraged investments, weakening property fundamentals and a tight credit market, many investors have moved to the sidelines, licking their wounds and nursing their portfolios. Uncertainty in the economy and capital markets, combined with recent poor performance by the real estate asset class, have left investors questioning their allocations, strategies and LP-GP relationships. These market conditions produced a limited number of fund closings in 2009, totaling only $39.6 billion, which pales in comparison to the 2008 total of $134.9 billion.
All of these headlines are circa 2009–2010.
Five to six years later, the commercial real estate story is one of redemption, for the asset class, for investors and for investment managers. In the aftermath of the Great Recession, the real estate market didn’t shrivel up and blow away, investors didn’t abandon the asset class, and, surprisingly, most lenders got it right this time with their patient “extend and pretend” strategy. Real estate has not only survived, it has thrived.
As of third quarter 2015, the NCREIF Property Index posted an annualized total return for the past five years of 12.55 percent. And buoyed by continued low interest rates and an improving economy, the U.S. property markets should continue to experience higher occupancies, rents and NOIs in 2016.
The bottom line: If you’re in the commercial real estate investment industry, you probably have more to be thankful for than most. With the holidays upon us, take some time to reflect, enjoy the company of family and friends, and be grateful. And, as often-quoted author Robert Brault advises, “Enjoy the little things, for one day you may look back and realize they were the big things.”
Happy holidays!
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Larry Gray is editorial director of Institutional Real Estate, Inc.
