1st Quarter 2011 Transaction Activity

The first quarter of 2011 is over.  From a sales standpoint how well did we do compared to previous years?  Shown below is the criteria we used to tabulate the results:

• Sales information from the CoStar Group database
• Transactions closed between January 1st and March 31st
• Investment transactions only (no owner occupied)
• Property types - apartments, office, flex, industrial, retail, mixed use & specialty use
• Transactions with sales prices of $1 million or larger
• Arms length transactions only
• Transactions located between Kelso, WA and Eugene, OR including Bend

Based on this criteria the chart shown below compares the sales activity for the 1st quarter for each of the last five years:

 
As you can see, the sale activity for the first quarter of 2011 increased significantly over 2010 but fell well below previous years.  The good news is that if this trend continues for the rest of this year, 2010 will have been the bottom of the market with a good possibility of improving sales activity going forward.   


We then analyzed the 45 sales transactions for the first quarter by property type.

As you can see apartments still are the most favored property type with 42 percent of the sales in the first quarter followed by retail.  Most of the retail sales were fast food franchises or single tenant buildings. 

Of the 45 sales transactions, only 35 identified the broker representation and only 38 identified the lending source used.  The remaining transactions did not provide sufficient information to determine the lender or if brokers were involved in the transactions.

Another way of looking at it, there were 45 paydays for all of the real estate brokers in the first quarter (17 x 2 = 34 + 7 +4 = 45).  So if you know how many of these transactions you were involved in, you can determine your market share. 

Shown below are the first quarter lending sources for the 38 sales transactions that a lender was identified.

Almost half of all sales transactions in the first quarter did not need new financing.  These results also explode the myth that life companies are back in the market.   After you take away the all cash buyers and assumed loans only 20 loans were placed in the first quarter, most of these from banks.  This paltry number of loans for the first quarter does not bode well for the mortgage brokerage community but hopefully we are on an improving trend.  I look forward to seeing how this quarter turns out.  Keep your fingers crossed.

What Impact Will Inflation Have on Commercial Real Estate?

After decades of little or no inflation there is mounting evidence that the Federal Reserve's Quantatitive Easing program is beginning to take its toll on the value of the dollar.  Shown below are some of these indicators:

• The Producer Price Index (PPI), which measures average changes in prices received by domestic producers for their output, is up 5.6% for the twelve months ending February 2011.
• Commodity prices are rising in relation to the dollar.  The price of gold hit an all time high earlier this week before settling down a bit.  Silver prices continue to soar hitting a 31 year high.  So far this year silver has gained 33% in value.
• A recent Deloitte Consulting poll indicated that 74% of those polled believe their spending will slow due to rising prices they are currently experiencing.

So what impact will inflation have on commercial real estate?  In the short-term the real question is what impact will the threat of inflation have on the Federal Reserve raising interest rates?  An increase in the federal funds rate would ease the concerns of those who fear inflation but it would likely have a detrimental impact on the fragile U.S. economy which is just beginning to show signs of recovery.  It's a delicate balance between these two policy positions.

In the long run, modest inflation would be a great benefit to commercial real estate, as long as it happens gradually so that the market can make the necessary adjustments along the way.  Real estate over the long run has been an excellent inflation hedge and it should be the same this time around too.  Over time, with modest inflation those commercial real estate investors who are currently upside down on their investment portfolio could gradually become whole again. 

My greatest fear is what happens in June when the Federal Reserve ends its own bond purchase program known as quantitative easing.  Who will fill the gap in buying U.S. Treasuries?  If no one steps in to the fill the void what will happen to interest rates?  Doesn't the law of supply and demand require that interest rates have to increase?  And more importantly how quickly will they rise and how dramatically?

Those are the questions that are currently being debated.  Surprisingly there is no clear consensus among the pundits.  We'll have to watch and see.  Stay tuned.  It's going to be fascinating to watch! 

Sources: PIMCO bets against U.S. government debt, Reuters, April 11, 2011; Don't Believe the Inflation Fear-Mongers, The Mark, April 12, 2011; Inflation Not a Threat? Most Consumers Aren't So Sure; CNBC.com, April 12, 2011; Gold Price Sinks After Hitting Ne High at $1,478, Gold Alert, April 11, 2011; Producer Price Indexes - February 2011, Bureau of Labor Statistics, March 16, 2011.