Expert Q&A: A Slow Recovery
Dec 1, 2008 12:00 PM, By Bob Bach, Senior vice President and Chief Economist for Grubb & Ellis
Grubb & Ellis' chief economist Bob Bach spoke last month at the company's 2009 forecast preview. Bach, who says there is no question we are now in a recession, predicts we won't see economic growth until the end of next year, with retail vacancies continuing to rise well into 2010. On the positive side, he says, we will likely see a recovery in the investment sales market next year, as more distressed assets come on-line.
Retail Traffic: How long might it take for the bailout money to work itself through the financial system?
Bob Bach: A lot of banks aren't really lending yet. I think it's going to be awhile; unless the government modifies the program to require that banks lend a specified percentage of the money. And, should they extend loans, they don't have to provide financing for commercial real estate. If they do, it will be to their very best customers.
RT: Do you think we will see more activity from commercial lenders in 2009?
Bach: I would say we will see more loans because we'll be seeing more compelling deals out there. This year, there's been a lot of fear. The lenders are afraid of losses they may incur — if they are in a counter-party transaction, they don't know what risk the counter-party is holding.
RT: If General Growth Properties goes bankrupt, do you think that could spur sales activity in the sector earlier than you had anticipated( the third quarter of 2009)?
Bach: Yes, I do. Anytime there are distressed sales it will mean an increased number of sales. At that point, prices will start to come down and cap rates are going to go up. General Growth has some good properties too, and they could sell them for some [good prices].
RT: Do you agree with Goldman Sachs and JPMorgan's assessment that cap rates on commercial properties will go up to the 9's?
Bach: I believe the cap rate forecasts by Goldman Sachs and JPMorgan equate to an increase of around 250 basis points from where we are now. I think we'll see cap rates rise 100 basis points next year and maybe another 50 to 100 basis points in 2010, so I'm a shade less pessimistic than they are.
RT: You've stated sales volumes next year will be comparable to 2004 or 2005. Has your outlook changed?
Bach: I think overall you will see a 15 percent increase in 2009 compared to this year because of distressed sales. This has been a year when everybody has been adjusting. There has been so much going on in 2008, people don't know what will be the next shoe to drop. In 2009, you will see a greater measure of stability.
RT: Will that also translate into looser underwriting terms?
Bach: Maybe marginally. I think the increase in deal volume next year will be due less to an easing of terms and more to the existence of compelling deals.
RT: Do you think we will see a comeback in CMBS next year?
Bach: I don't expect CMBS to recover at all next year. I think it will be awhile before Treasury, the Fed and the SEC get around to designing new regulations for CMBS and other asset-backed securities because they have their hands full trying to rescue the global financial system — bigger fish to fry in other words. Until that happens, investor appetite for CMBS will be nil.
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