Posted by ray@lcorn on August 05, 2011 at 09:38:49:
Sounds contradictory, but the transaction stats showing major percentage increases and your intuition that deal volume is still depressed are both right.
The MBA percentage increases are real. However, be aware that this is really a ratio of year over year transactions. The ratio is produced with a numerator (current transactions, YTD 2011) and a denominator (last year’s transactions, equal YTD 2010).
When the previous period is at more than one standard deviation from the mean it begins to skew the ratio. This is known as the denominator effect, and the triple-digit increases are due to the severely depressed transaction volumes of the past two years.
In periods like this the only way to get a real read on conditions is to look at nominal values. For example, CMBS loan volume peaked in 2007 at $240bn, then dropped to a low of about $10bn in 2010. This year CMBS issues are expected to be about $40bn, a percentage increase of 400% over 2010, but the nominal value compared to the 2007 peak is 17%.
Same goes for almost every data set. One of my pet peeves is the government’s insistence on using quarter over quarter GDP ratio, which guarantees a positive number after a downturn and obscures weakness in nominal growth/contraction. Same for expressing debt and deficits as a percentage of GDP. That’s like saying I owe only 10% of all the income in my neighborhood, even though it isn’t mine. (Of course the current gov’t considers all income theirs, eh?)
There’s a rant starting here… let’s move on.
On a nominal basis transaction volumes are increasing, however you are correct that a lot of money is still on the sidelines. In the past six months I’ve read of over $400bn being returned to investors from blank-check vulture funds targeting distressed CRE property and debt. The 50%-75% discounts need to make their model viable did not materialize.
One of the benefits to CRE of extreme stock market volatility (like the past two weeks) is that after the initial flight to safety in treasuries, once the storm passes that cash will be out looking for yield. We’ve seen this scenario before… most recently in 2001 and 2008. CRE is positioned perfectly to capture that capital. Stable cash flow, low interest rates used to boost leveraged returns, tax advantaged, and readily available nationwide.
Bank lending for CRE is also picking up. My firm has received financing commitments for over $4mm in the past 3 months. All in all the current financial market chaos is a net plus to CRE.
p.s. I can’t help tooting my own horn just a bit… those of yo that have my 2011 Forecast (see http://www.creonline.com/catalog/b-161.html), look on page 20, the projection for 5 & 10 yr. treasury rates falling to 1.5% and 2.5% respectively by Q3 2011, which were within a few basis points of yesterday’s close.