02/18/2009

Gloomy Outlook Dims CB Ranking Victory

CB Richard Ellis dethroned Eastdil Secured last year as the nation's most active brokerage across the five major property types, but the victory came amid plunging sales activity and an increasingly gloomy outlook for 2009.

Brokers, who held out a glimmer of hope in the fourth quarter that things would pick up in 2009, now think the year might be a complete washout. After seeing overall sales volume drop by 66% in 2008, to $82.8 billion, brokers expect another substantial drop in activity this year.

CB brokered $17.7 billion of transactions in 2008, capturing Real Estate Alert's third annual composite broker ranking. While CB's volume dropped 60%, that was less than the overall market decline. So the brokerage's market share climbed, to 27.5% from 21% in 2007.

Eastdil's volume fell 85% - the largest decline in the ranking. Eastdil brokered $9.9 billion of transactions, down from $67.2 billion in 2007. Its market share slumped to 15.5%, from 33.2%. Rounding out the Top 5 were Cushman & Wakefield (11.5% market share), Holliday Fenoglio Fowler (7.9%) and Jones Lang LaSalle (5.2%). No other brokerage weighed in with a market share above 3.6%, according to Real Estate Alert's Deal Database, which tracks transactions of at least $25 million.

As recently as late last year, brokers held out hope that the investment-sales market would stabilize in 2009. They expected a rising tide of recapitalizations by distressed owners needing to refinance maturing debt. They also believed that properties with long-term assumable financing would trade at a steady clip. And some expected a liquidity revival amid federal efforts to stabilize the battered financial markets.

But even that cautious optimism has been dashed, and now pessimism is virtually universal. "No one knows what we can sell things for right now," said a veteran investor at one high-yield fund shop.

The prospect of recapitalizations has morphed into talk that buyers will snatch up foreclosed properties from lenders for less than 50 cents on the dollar. While that may lead to some brokered sales, it won't make up for the broader decline in activity - partly because seizing and selling properties can be a lengthy process for lenders.

As for sales with assumable financing, they're unlikely, except for properties with long-term leases in place. Due to the sour economy, lenders and buyers now find it next to impossible to forecast rents on future leases. Vacancy rates are on the rise nationwide, so brokers are wary of predicting how and when rents will bottom out.

Some market players still hope that banks will start lending again this year, after suffering huge losses since the credit crunch took hold in mid-2007. But the surviving banks will be much more strict about lending terms, which would likely hamper sales of transitional properties and keep pricing in check.

The upshot: If buyers can only get 50-60% leverage, rather than the 65-75% leverage of years past, they are going to seek higher initial capitalization rates. "Cap rates are now at 8%," a high-yield investor said, referring to Manhattan office properties. "They were at less than 4% [in 2007], but they aren't going back to that." With vacancies on the rise, there's little reason for buyers to accept higher prices, he added.

So what will keep brokers busy this year?

They're likely to focus on sales of foreclosed properties, including a substantial amount of offerings from Fannie Mae and Freddie Mac. Brokers could also try drumming up business from distressed sellers, such as cash-starved REITs and open-end funds.

Meanwhile, lenders will keep hiring brokerages as advisors to help assign values to properties they have assumed or plan to seize. Eastdil, for example, will have its hands full as parent Wells Fargo reviews the huge loan portfolio it recently inherited by taking over Wachovia.

Still, sales of office, retail, multi-family, industrial and hotel properties could plunge again this year, unless buyers find ways to obtain leverage beyond assumable financing. As activity plummeted from a record high of $242.4 billion in 2007, most of last year's sales took place by the end of the third quarters. Deal volume slumped after the stock and bond markets tanked in September.

With deal volume sliding in every sector, CB was the top broker of office, industrial and multi-family properties. It finished a close second to Eastdil in sales of retail shopping centers. Hodges Ward Elliott led the hotel-sales league table again last year.

Apartment Realty Advisors, which was the second-most active broker of multi-family properties, finished sixth overall with $2.3 billion of sales. Its 3.6% market share made it the most-active specialty or boutique brokerage.

The ranking was based on transactions of $25 million or more that closed last year. The figures include sales of full interests or majority stakes in office, retail, multi-family hotel and industrial properties. When multiple brokers shared a listing, the dollar credit was divided evenly. Portfolio transactions were included if the sales price was at least $200 million or if it was known that at least one property was valued at $25 million or more.

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