It is clearer now that 2015 was a post-global financial crisis peak in terms of investment and capital markets. Although Q4 numbers are yet to crystallize, after recording a 10-month year-on-year volume decrease of 8 percent to $454 billion, brokerage giant JLL forecasts the year will come in 10 percent down. We at PERE, meanwhile, have seen closed-ended fundraising drop 29 percent to $78 billion. Even the FTSE EPRA/NAREIT Developed Index is down by the best part of €1,000 to €3,500 from a year earlier, as at the end of last month.
And yet prime pricing is barely moving. That is partly due to sufficient deal volume in most markets, where in the US, post-Trump election victory, New York, Los Angeles and Chicago have seen yields move as little as 10-20 basis points, JLL says, or in the UK post-Brexit, where London’s yields remained defiantly flat. Today, prime offices in New York yield 3.4 percent, London 3.5 percent and Hong Kong 3.2 percent. Whether you assume artificially-induced low interest rates in the short to medium-term or not, that leaves little margin for error.
Digesting these readings, it makes sense to re-examine the sector’s common rhetoric. Time and again we hear executives say buying secondary assets in prime locations is preferable to prime assets in secondary locations. And yet some of the elder statesmen say different, and to them I would listen. At PERE’s New York Summit last month, Sam Zell extolled the virtues of finding your Toledo: a market where he found institutional competition competition was scarce, so picking prime assets with comparably higher yields than those in gateway cities was an easier affair. In a complementary commentary, last month, Taurus’ chairman Lorenz Reibling denounced the insatiable demand for prime asset buying in prime locations as tantamount to herding – a factor, he said, which makes investments vulnerable to external shocks.
So what do you do in 2017? For those stewarding large amounts of limited-life, liability-matching capital, Zell and Reibling’s words make sense. For those with longer term money, prioritizing through-cycle demographic trends is sensible. Managing both in each case is the panacea.
There’s plenty to ponder. But do give yourself a little time to rest during the holiday period. I’m sure after the year you have had, you have earned it.
Best holiday wishes,