US risk appetite may take generation to recover

With transaction volumes down 80% over the past year alone, Jones Lang LaSalle warns that US investor appetite would only start to return in mid-2010, and could take a generation to recover to the levels seen in 2007. However, foreign investors are starting to ramp up their strategies.

Investor appetite for risk in the US real estate markets could take up to a generation to recover to the levels seen at the height of the property boom.

Domestic investor interest in US real estate would slowly start to return by mid-2010, a mid-year capital markets report by Jones Lang LaSalle said.

Foreign investor appetite though was already growing, with German open-ended fund Deka Immobilien today confirming it had bought the Washington DC office at 1999 K St NW from US REIT Vornado Realty for $208 million. The deal represents an $830-per-square-foot price tag.
“There are a select few foreign investors bidding and winning on off-market investments today,” Steve Collins, managing director of Jones Lang LaSalle’s International Capital Group said in a statement. He added that German property funds and Japanese development firms were likely to push harder in the final quarter of 2009 and the start of 2010. “The investment environment is starting to materially change.”

The bulletin said that US transaction levels were down 80 percent in the first half of 2009 compared to 12 months earlier, and off 93 percent compared to the first six months of 2007. Capital values have dropped by up to 55 percent from their peak to the second quarter of this year.

The US government’s stimulus package had “effectively halted an economic free-fall”, the report said, but it had also stalled the recovery of the debt markets, with many banks now extending loan maturities to avoid foreclosure. The ‘delay and pray’ attitude would postpone “true debt liquidity [from] return[ing] to the market until mid-2010 at the earliest”, Kenneth Rudy, president of JLL’s capital markets practice said.

The real estate services firm said London was leading global markets in repricing assets, and could be nearing a “pricing point bottom”.

“As the market recovers through the first several years of the next decade, $100 billion in overall commercial property volume may be considered average while $125-150 billion would be a very strong year,” added vice president Josh Gelormini. In the first half of 2007, commercial property volumes reached $231.4 billion.