As we look forward to a new year, I am pleased to share my thoughts on the very memorable 12 months past, and to offer my outlook for the commercial real estate market in 2012. Before I do, I would be remiss if I did not thank the Sperry Van Ness clients, Advisors, staff, and fellow brokers for their contributions in driving us forward in spite of the unpredictable times. I know that I speak for all SVN Advisors and staff when I wish you a prosperous New Year.

A Year of Fits and Starts for Commercial Real Estate

During a year of extraordinary economic and political uncertainties, commercial real estate held its position as a crucial safe haven for investors in 2011. Investment into the sector reached a peak in the second quarter, supported by CMBS conduit originators and more active life company and bank lenders. Even as economic and employment trends fell short, leasing activity for well-positioned assets strengthened. During this period, investment into segments of the market that had lagged during 2010, including commercial properties in secondary and tertiary markets and value-add opportunities, showed signs of firming, as well.

In spite of the rising momentum, commercial real estate investors revealed they were not entirely immune to the obstacles facing the wider recovery in business confidence. As I suggested in my New Year’s message one year ago, this has been a period of fits and starts. Over the summer, renewed disruptions of capital and credit that were largely unrelated to the property sector threw the conduit into disarray and slowed the pace of transaction activity more broadly. For many borrowers, lending sources pulled back once again, with the result that a larger share of pending sales has struggled to reach closing.

While sales volume in the third and fourth quarters will not match the spring’s flurry of trades, the shifts in the market must be understood in the context of a turbulent economic and political environment. Where investors have retrenched, it is often under the force of external pressures. It nonetheless remains clear from the current diversity of investors and lenders that commercial real estate is high on the investment hierarchy. In fact, many of the last twelve months’ most notable and most visible deals only came to fruition as the year drew to a close. The fundraising activities of the major REITs support this assessment, as well. US REITs raised $37.5 billion in equity in 2011, a new record that easily surpasses the previous high of $32.7 billion set in 1997. They raised another $13.8 billion in unsecured debt.

A Persistent Imbalance

In the final tally, investment sales in 2011 will easily surpass the $120 billion benchmark set in 2010 and will roughly triple the record lows set in 2009. As a wider range of buyers and sellers have reengaged, pricing in the most actively traded markets has exhibited the sharpest improvements. In the extreme, some highly coveted trophy properties have prompted aggressive bidding by domestic and cross-border buyers and have ultimately sold at higher prices than during the market peak in 2006 and 2007.

While the most visible investments affirm institutional investors’ confidence in the sector, they offer only one perspective on the market. As I pointed out at this time last year, the headline statistics do not fully convey the unevenness of the recovery or the diversity of its investors. The market for assets that do not dominate their respective cities’ skylines is necessarily recovering along its own trajectory. In the current market, that has meant a balance of tailwinds and headwinds that has weighed in favor of the latter.

Core investors whose scope may be limited to a subset of metropolitan areas have argued that rising prices and falling cap rates will inevitably spill over into other segments of the market. In one respect, this is correct. Yields on mid-cap investments are higher than for any trophy property. But that assessment also overlooks the uniqueness of the market for small- and mid-cap commercial properties and the very different makeup of the investor and lender base. Understanding these differences is crucial to assessments of what the next year will hold for commercial real estate.

The Economy, Jobs, and the Political Deadlock

As in previous cycles, the recovery in small- and mid-cap property investment is proving more sensitive to underlying drivers of cash flow than the market for the largest properties. This inevitably means that a strong economic recovery will be one of the requisites for more robust investment. While companies have seen their profits rebound, surpassing their previous peaks from 2007, an environment of extraordinary economic and political uncertainty has constrained decision-making and investment in new tools and people.

In the first days of 2012, the employment outlook looks brighter. For commercial real estate – and for millions of families across the country that have struggled with unemployment – this is the critical missing link to a more balanced recovery. Although the data on job creation in 2011 only shows a modest improvement over the prior year, leading indicators of firm hiring have turned more positive. Job openings have been trending up consistently over the last year. More recently, first-time applications for unemployment insurance have fallen back to their lowest levels since early 2009. Further, employment gains in temporary help services have picked-up over the past 5 months, which lends well to permanent job creation. Even though single-family housing shows no definitive signs of an inflexion, other metrics indicate that marginally stronger growth in 2012 will support a healthier pace of private sector job creation.

Regrettably, an environment of political dysfunction qualifies the outlook, both at home and in Europe. In fact, the latter presents one of the most credible threats to global growth. In the United States, the uncertainties presented by unusually intrusive policymaking may resolve over the next year, given the need for all parties to clarify their political positions and objectives as Election Day approaches. Needless to say, a business environment where the rules of the game are more predictable is more conducive to growth and job creation.

Investment Sales and Financing

As much as it depends on a stronger economic trajectory, the outlook for small- and mid-cap investment also relies on buyers’ access to financing. In financing their investments, large REITs may offer shares or issue unsecured bonds; trophy investments have also been supported by favorable lending terms from life companies and large international banks. These scenarios are not reflective of the market for smaller assets where the sources of risk and its mitigating factors can be very different. Given the historically dominant role of regional banks and CMBS lenders in facilitating this segment of the market, these lenders figure prominently in the assessment of what the next year will hold.

Although the CMBS market has struggled to reassert itself since last summer’s interruption, plans for new issuance in the first quarter of 2012 indicate a gradual increase in conduit origination activity. Surprising as it may seem, stability in global bond markets is an important condition for well-functioning CMBS markets, since the spreads on the latter’s bond yields are influenced by corporate bond market trends, as well. In the first half of 2011, more than half the CMBS loans securitized had origination balances of less the $10 million. It remains the case that a more active CMBS market is required for the small and mid-cap segments to flourish, in particular, as a large number of seasoned CMBS loans mature over the coming year.

Outside of the apartment sector, where generally improving fundamentals and the contributions of Fannie Mae and Freddie Mac are facilitating both sales and new development, commercial property investors are dependent on bank financing given an absence of other debt sources. For the last several years, that has presented a problem. Banks have been preoccupied with the management of their distress portfolios and have hesitated to extend new credit, even in the best of cases. The most recent data show those priorities changing. Banks’ default rates on their commercial and apartment loans have fallen consistently over the last year. Coinciding with the stronger performance of the legacy balance sheets, many banks are accelerating the liquidation of bad loans and real estate-owned. A growing minority are lending again, increasing their exposure in segments of the market where an absence of competition and low interest rates are affording opportunities to extend credit. Improvements in bank lending and CMBS issuance will have a disproportionately positive impact on the mid-cap market. Access to historically low-cost credit in 2012 and the likelihood of higher interest rates in 2013 signal an unmatched window of opportunity for acquisitions over the next 12 months.

Conclusions

The economic and jobs outlook is improving. With so many of the underpinnings of a stronger recovery in place, we can afford a degree of optimism. Politics and the possibility of external shocks, primarily from Europe, still qualify that optimism.

While prices in the largest markets have recaptured a significant share of their lost value, other assets have lagged the headline measures. Combined with historically low borrowing costs, there is tremendous upside potential for borrowers with access to financing who can identify well-positioned assets.

While the process has been frustratingly slow, more banks are moving distress off their balance sheets. This process has the potential to accelerate in 2012, given banks’ stronger positions generally, an evolving regulatory environment, and the potential for distress from maturing CMBS. That will create some pressures on the market, but it should also deepen the pool of distressed assets and notes for sale.

Attention will necessarily turn to the small and mid-cap market as the economy improves and financing options broaden. Given our experience in this arena, we are anticipating a high volume of advisory work to identify and market investment opportunities before consensus firms. Timing will be the crucial differentiator in this market – the intersection of low-cost financing and first-mover advantage demands that we act deliberately.

My new iPhone 4s arrived finally arrived this past weekend. My oldest son and I opened the package with much anticipation and we immediately dropped what we were doing to configure the device. Among the many new features made part of the 4s is Siri – the speech recognition device which, as Apple advertises, “Understands what you say, knows what you mean, and takes dictation.” So, gone are the days when I have to manually type a query into Google to search for a nearby Sushi restaurant, find directions, or, get this – type to text or email. From now on, all I have to do is talk. So, over the weekend I dictated and had Siri read aloud roughly 100 text messages sent and received. I quickly grew so accustomed to iPhone dictation that I became annoyed when I had to manually type an email on my Mac later that evening. On one hand, I felt more efficient, on the other hand I questioned if I was simply becoming lazy…

Separately, as a CEO, I am constantly striving to predict the future and react to it in advance. Not only with respect to positional real estate strategies, but also in terms of adopting (and creating) new intellectual technologies – which extend mental capabilities and enable us to gain more information faster. So as a fan of applications in this category, I’ve researched and adopted as many CRE and non-CRE of these intellectual technologies as anyone. I use Dragan Dictation to dictate most of my laptop writing, regularly use Loopnet to create space surveys, view comps, and get a read on the market. SVN Advisors are LoopNet power users and many are subscribers to CoStar, including their CoStar Go iPad app, which allows you to take real estate data into the field, where you can even view detailed tenant information, including lease expiration dates without having to charm past building security or receptionists. And all of this has me thinking – are the convenience applications mentioned above changing the way I learn, eroding at certain skill sets, and making me less knowledgeable?

While I can say with reasonable certainty that my IQ remains the same since becoming an early adopter, my ability to easily become immersed in the analysis of raw research data has eroded. In addition, my typing skills aren’t what they used to be and my spelling skills, thanks to auto-correct, have gone from good to average. For those of us in CRE (or any other field for that matter), what role have research products played in the reduction in the amount of market research that we retain? Posed another way, are the CRE practitioners of yesteryear, who had to physically walk building floors, drive every property in their area of focus, conduct live courthouse research, etc., more knowledgeable than we brokers of today?

Are we becoming dependent upon these resources because we’re lazy, or because we need to in order to remain competitive? I’m not making a value judgment here, I’m just asking you to do a gut check – Do you use technology to advance your learning, or to fill a knowledge gap? The distinction between the two is subtle, yet important.

The human brain is malleable. It is capable of being reshaped and while I don’t know the answer to the above questions, I do know that my mind now approaches learning a bit differently. My mind now expects to receive information the way that Loopnet feeds it to me – instantly, and with little effort. I have made it a personal challenge to add to my cognitive skills rather than replace them. This has required me to slow down in the short run at times, but in the long run I feel as if I’m expanding my knowledge base, not shrinking it.

So, I ask – has our “encyclopedic knowledge” of CRE markets and beyond become artificial intelligence? Are Loopnet/Costar and the like making us stupid, or are we better off? I think the answer largely depends on approach and motivation. Thoughts?

With less than 100 days remaining in 2011, I want to pose the following question: “What will YOU do differently in 2012?” You cannot simply repeat your 2011 performance in 2012 and expect the outcome to be any different. My message is a rather simple, yet important one – the market doesn’t matter, but YOUR actions do! Accepting the norm accomplishes little more than sentencing yourself to mediocrity, while radicalizing the norm creates opportunity even when markets don’t seem to be sympathetic to your cause.

While commercial real estate markets are certainly not static, I’m always surprised at the numbers of people who operate as if they were. As the landscape around them changes, rather than understanding and adapting to new market drivers, many just prefer to pretend as if it’s business as usual. However, it is those who adapt to the fluidity of the market who become innovative market leaders, and who thrive during even the toughest of market conditions. Likewise, it is those who refuse to change with the times that push themselves into irrelevancy, and eventually become self-inflicted casualties of the weeding-out process.

What is not so obvious is that during times of adversity come the greatest opportunities. Those who thrived during the past few years understood this principle, and as a result, they will likely be the ones who lead the way in 2012 as well. Successful companies adapt their business models, re-engineer their business practices, and implement new strategies and tactics while their peers sit on the sidelines wondering what went wrong.

Rather than talking about constricted capital markets, successful companies seek out the investors and lenders still doing deals, and restructure transactions to fit the changing guidelines of active capital partners. Rather than complain about transaction bottlenecks, the smart players work with institutions and special assets groups to work around and through the logjams. Rather than work with brokers replete with excuses about why they’re not successful, they find brokers who focus on outcomes and not excuses. They key to success in down markets is to participate in the present while looking toward the future, but refusing to allow yourself to live in the past.

So some chest pounding now – not to advertise, but because I think it’s relevant:

At Sperry Van Ness we’ve led the charge to radicalize the brokerage industry. Since our inception we’ve done business differently than other brokerage firms. From pioneering an open-source brokerage model, to being the first brokerage firm to mandate 100% social media adoption, to being the first to have an in-house auction firm, to being the first to adopt a cloud-based business platform, we have focused on doing business based upon where the market is headed, not where it’s been.

At Sperry Van Ness, we realized several years ago that traditional business models could not service non-traditional markets. When our competitors were cutting back as they adopted the bunker mentality of watch and wait, we were growing, and we did it based on a debt-free, profitable business model. It was clear to us that we needed to continue to adapt to the needs of our clients, and that together, we would not only survive the challenges of changing markets, but we would thrive amidst them.

My encouragement to you as we enter 2012 is to refuse to buy into the negative rhetoric. Don’t settle for working with advisors who offer excuses, engage professionals whose work demonstrates they value your relationship as much as they say they do. Don’t tolerate brokers who embrace the status quo, but look for those who shatter it. Look for business partners rather than vendors. Find those firms willing to serve you, regardless of whether a commission exists or not. Look for those willing to embrace change, those who innovate, and those who radicalize the norm.

If you haven’t experienced working with a brokerage firm who embodies the ethos I’ve described above, then I invite you to contact us and experience the Sperry Van Ness difference for yourself.

The impact and the power associated with mobilizing people for a purpose are rooted in fundamental economics – they are nothing new. From electing a government official, to spreading word of and organizing an “Aquarian exhibition” of 500,000 people at Woodstock in 1969, ideating among a critical mass of people, sharing and sourcing information while leveraging the power of numbers and virality have always been present in society. Aligned crowds, we call them “smart mobs” today, are driving virtually every major trend in the global economy.

What’s new, and ever evolving, is the technology which is enabling crowds to be catalyzed, assimilated, and leveraged like never before. If we examine only the past five years, we see how rapidly the speed and power of group collaboration has increased to create value to stakeholders in ways that were previously thought unimaginable. “Technology enabled collaboration,” as its been dubbed, is in full force and effect in almost every industry on the planet. From Restaurants to Travel, and from Yelp to Orbitz, people and businesses are organizing, collaborating, sharing and peering for the purposes of lowering costs, improving quality, saving time, and even curing disease.

Another fundamental shift that has taken place over the last decade is the move from proprietary to transparent, from closed architecture to open source, from a world controlled by scarcity to one opened up by sharing. The power in business is no longer generated by those who control something, but by those who share it. I recall a friend of mine saying: “business has never been about addition or subtraction – it has always been about multiplication.” No greater multiplier exists than creating an impassioned, intentional movement based upon meeting a market driven need.

The following statement may seem counter-intuitive to many still clinging to their old-school ways, but businesses today need to understand they probably cannot control the marketplace by the uniqueness of a product or service, therefore their only choice is to empower the marketplace by adding value. Sage advice then, would be to not get sucked into the frivolity of attempting to control a market – be disruptive by opening it up.

Sustainability for businesses will be found in how quickly businesses can embrace sharing, not how long they can hold a market hostage. Few people will argue with the fact that business has, and will always be, about relationships. We can debate positional variances between qualitative, quantitative, and relational impact, but the market has ended one debate – you don’t control relationships you empower them.

Despite this movement, and hitting a bit closer to home, the commercial real estate industry seems to have been immune to the collaborative trend, and continues to operate much in the same way as it has for 20-30 years. When my firm (Sperry Van Ness) broke from the industry standard approach more than 25 years ago by adopting a set of core covenants, which gave birth to our ethos of compensated cooperation and participation with the entire brokerage community to market our inventory, we were looked at as heretics among our peers. I’m certain as time has evolved our “heretical” approach is now seen as having set the chinning bar for how the industry should operate.

The problem is that while the marketplace recognizes the benefit of the aforementioned model, the brokerage industry as a whole continues to operate with much of the same opacity, often times at the expense of the client and to the benefit of the brokerages. “Quietly” marketing properties, offering zero fee incentive for other brokers to help sell a listing, inserting eyeball roadblocks like overused registration and confidentiality requirements are still par for the course. Has any other industry been more immune to the advancements of technology enabled collaboration than commercial real estate?

When will our industry as a whole to come out of the shadows, cease with the ethereal and mercurial, embrace fundamental economic concepts like supply and demand and operate in the light of day? In the future, the market will simply not tolerate anything less than an authentic and transparent approach to business.

What say you?

The reality is that nowadays most of us are accustomed to receiving certain services (information and data) free of charge, and on the surface, with no strings attached and for nothing in return. Not a marketing gimmick like “Buy two get one free” (which is often the same as marking down a 2x marked-up product by 50% if you buy two), or the classic ad supported online newspaper and content model, but an increasingly important economic model whose genuinely free offerings are changing the ways in which consumers use (and purchase) products and services.

Coined “Freemium,” by venture capitalist Fred Wilson (@FredWilson), the word is a portmanteau, which combines the words “Free,” and “Premium,” to describe a business model which follows one basic principle: Give a core product away for free to a critical mass of consumers, and sell a small percentage of them a premium product.

Not Gillette, which practically gives their blades away for free, charging through the nose for their razors, or cell phone companies “giving” away the phone and charging for a data plan and two year commitment, but something, which, according to Peter Froberg (@PeterFroberg), a growth consultant with whom I work, “can be used in and of itself, without necessarily buying something else.” He likens the model to the fruit stand operator who offers free, sweet, sliced apples to entice his customers not to buy apples, “that’s fake free,” he says, but to buy pears instead.

For most, the Freemium model best resonates when discussing Skype. To date, Sykpe’s free VoIP product has provided more than 1B downloads, and provided more than 16B call minutes of “Skype-to-Skype” calls. During that same time period, “Skype-Out” call minutes, Skype’s premium product, has accounted for only 2.2B of those minutes. A low percentage, of paying users, indeed, but enough to generate $21M in operating profit in 2010 (a big swing from their $352M growth related loss of 2009). Other emerging Freemium companies which feature ten’s of thousand’s of users include Evernote, Boardsuite, Linkedin, Pandora, Google (not exactly an “emerging” company), and more.

Closer to my (industry) home, we find that LoopNet has been operating with a Freemium model for years – Free to post, free to search but with a paywall over Premium Search (access to newly listed properties), and Premium Lister access, which features more prominent portal placement and access to leads. Like them or not, the Freemium model has served them well…they are a profitable, $750M company recently acquired by CoStar.

Hundreds of businesses, most of which are in technology or in the Web 2.0 space are utilizing Freemium models to generate profits – giving something away for free, and charging for another, often completely different product in the process. And in the course of my researching the Freemium space, it occurred to me that commercial and residential real estate brokers alike have for years been operating with a Freemium model.

Peruse any national brokerage’s website, and you will find an abundance of free, well written subject matter, like market overview’s, reason’s to buy, reason’s to sell, and so on (at SVN, we just released our annual “Top Market’s To Watch” report). For some of the same reason’s I’m blogging, which include strengthening my personal brand, establishing credibility by demonstrating my ability to think critically, these companies work to create valuable content and strengthen their brands in the hopes that the reader will buy something else – their premium products.

However, just as Freemium is emerging as a legitimate business model supported by empirical data, I’m hearing more about the brokerage best practice of charging for everything one does – no more free advice, abstracts, surveys and reports. So for those of us who are CRE practitioners, I ask you – Is the aforementioned “best practice” yet another example of the brokerage industry operating in the stone ages…a little slow on the uptake, or does the Freemium concept represent what leadership and strategy advisor Mike Myatt (@MikeMyatt) refers to as a “next practice” capable of creating a disruptive change in an industry prone to herd mentality? While I believe there to be truth in the old saying “free is a very good price,” I’d be interested your opinions – please do share.

These developments, alongside heightened volatility in stock markets, have obviously prompted concerns about the resilience of the commercial real estate recovery. In assessing what all of this means for the investment outlook, our clients are looking to us for leadership and a more balanced, long-term assessment of the future. Along those lines, and while I could certainly fill this post with a summary of the downside risks stemming from recent events which have recently imbued the blogosphere, the following is a different but pragmatic take on the road ahead – the market is currently sensitive to the downside risks, but it is also prone at this juncture to discount positive information. There is some good news, which stands apart from the cacophony of recently sounded panic alarms.

On the economic front, there are indications of continuing resilience. Among them, the details of last Friday’s employment report have been lost in the discussion of the downgrade. That report shows the private sector adding over 150,000 jobs during July, easily beating economists’ projections. And while job growth needs to improve further, it is significant that businesses added a meaningful number of jobs even in the midst of the budget crisis. Corporate profits have rebounded, more than doubling from their recession levels and even surpassing their pre-recession peaks. Those profits will feed hiring once a sense of long-term normalcy returns to the market.

Closer to my world, trends in commercial real estate investment markets suggest a degree of resilience in the face of market disruptions. Some of the key trends to consider are as follows:

Investment Activity Continues to Increase

CRE property sales continued to increase in the second quarter, hitting levels comparable with sales during 2008. Even as the economic news has become more tentative, activity in July remained strong. The large coastal markets remain the most active, but rapid declines in cap rates in these locations are supporting a stronger value proposition in secondary and tertiary markets and for relatively smaller properties. Spillovers into the middle market have been slower in coming, in part because sales depend on the availability of financing, but that piece of the puzzle is also falling into place.

Credit Availability is Improving

The latest data show that delinquency and default rates at the regional and community banks that account for a large share of mid-size and small property lending have come off their peaks. As the stress from legacy loans has become more manageable for many institutions, a large number have actively returned to the market in making new loans. These banks are less active in the major metros, where lending by foreign banks and other lenders is driving outcomes. Instead, they are relatively more active in the markets where large institutional lenders and investors are not. CMBS lending is also contributing to credit availability for mid- and small-tier borrowers. We expect CMBS to be an important contributor to overall credit availability, in spite of recent bumps in the road for issuers.

As for today’s downgrade of Fannie Mae and Freddie Mac, this probably means higher costs of capital for these institutions, in spite of their unique relationship to the government under their conservatorship arrangement. Not receiving much attention over the last 3 days, however, is that strong fundamentals in the apartment sector mean that other sources of credit are eager to finance investment activity. This is clearly in evidence with banks, which Chandan Economics find have increased their net apartment lending in 2011. Keep in mind that residential mortgage rates will generally rise if Fannie and Freddie’s costs go up. That supports apartment fundamentals, supporting non-GSE lenders’ favorable assessments of the sector’s risk profile.

S&P Downgrade a Wake Up Call in Washington

I’m oversimplifying, but the U.S. debt downgrade, in my opinion, wasn’t much about the ratio of public debt to GDP or any other metric for that matter – the downgrade wasn’t rooted in math, or with respect to the U.S.’s ABILITY to service its debt. Rather, the downgrade was about our government’s WILLINGNESS to do so. The chaotic two month’s in Washington and the partisan rancor which transpired was significant, and spoke as much to the likelihood of default as anything.

Perhaps most important, when issued, the S&P downgrade offered very little in the way of new information about the quality of US debt. More than anything, it spoke to the character of the U.S. government. Dare I say that this may trigger a new, more levelheaded approach to governance and policymaking? With many of the pieces of a resilient recovery in place, stronger signals from our elected officials that the rules of business will normalize and that our countries’ challenges will be addressed in a timely and meaningful way, this could be the best legacy of the ratings rebuke. Until then, be on the lookout for continued improvements in credit availability, the debt capital markets, and other positive economic indicators which fuel the resilient commercial real estate marketplace.

I’m not being Pollyanna, but there is some good news to consider of as of late.

For many years, we at SVN have issued our annual Top Markets to Watch report.  Segmented by product type, the report seeks not to dissuade investors from targeting markets omitted from the report, but rather to highlight those markets which we believe to be positively influenced by emerging trends.  Included in the third issue of our The Advisor magazine, it is our hope that you extract actionable insights from the report’s rich content, regardless of your position in the industry. A brief synopsis is as follows:

Defying expectations during the depths of the financial crisis, an extraordinary investment rebound in major coastal markets fueled a rapid recovery in sales volume in late 2010. In 2011, sharply lower cap rates in these major markets are motivating investors to explore a broader range of opportunities. Apart from the search for yield, the improving economic outlook and a revival of credit channels, including the CMBS market, are now enabling buyers to reengage with sellers across a widening geography.

The metros included in this year’s Top Markets to Watch lists reflect this evolution and are as varied as today’s investors. Some markets and property types will appeal to buyers eager to compete aggressively for highly liquid properties. Other markets will appeal to discerning investors with an eye for long-term value or the turnaround potential of a distressed asset. The common thread, every market in this year’s lists offers a unique opportunity for investors to capitalize on commercial real estate’s resurgence.

The Advisor Magazine – Top Markets to Watch.

Today’s post won’t be long, but I think perhaps brevity is well suited for the message. It was Shakespeare who said “brevity is the wit of soul.” – I tend to concur. While today’s message is specifically directed at our Advisors, I hope others that read it will take away positive, actionable insights as well.

To our Advisors: You need to know that I just haven’t been able to shake a few thoughts which have truly invaded my brain, and which stemmed from our recent national conference in Las Vegas – I want to briefly share those with you. First, as your CEO it was my job to set the vision for the conference and to deliver what was a hopefully inspiring and motivating message. While I trust that I successfully accomplished this, what I can’t get over is how much inspiration and motivation was given to me by YOU. I spoke a lot about the benefits of our unique culture, and quite frankly, it was easy to see why as I reflect on the many conversations I was able to have with those in attendance.

It is YOU that makes Sperry Van Ness what it is. It is YOU that I draw my inspiration from. It is YOU that consistently build our brand equity. It is YOU that encourage me. It is YOU that serve our clients well. It is YOU that create our special culture. It is YOU that I’m honored to serve. It is YOU that I’m thankful for. YOU are Sperry Van Ness. YOU are the future of Commercial Real Estate.

For nearly 20 years, Sam Zell, the grave dancing, yet eternally optimistic public and private entrepreneurial investor, has issued hard hitting prognostications. In typical, creative, Zell fashion, he delivers his predictions for the year ahead in the form of year end gifts – bronze encased music boxes. Redesigned each year with a new look and feel, their one commonality is that all of the boxes share one feature – when you press a button, you are rewarded with the music of a popular tune, accompanied by lyrics, written (but not sung) by Zell, wherein he expresses his current view of the world.

On the heels of a difficult 1994, Zell’s music box theme was “Staying Alive,” which, perhaps, would have been equally apropos in any of the last 3 years.  The music in 2005 was set to Burt Bacharach’s “Raindrops” classic, which included such lyrics as “Capital is raining on my head…”  But my all time favorite was his 1999 edition, the theme of which was “The Emperor Has No Clothes,” where Zell played off of the similarly titled Hans Christian Anderson story, suggesting, with remarkable accuracy, that the valuations of the technology companies of the day were way out of whack – without balance sheets, earnings, and in some cases, revenue.  Interestingly, and consistent with his 1994 theme, the lyrics could be applied to later, more contemporary controversies, such as the over-valued commercial real estate market of a few years ago.

Like him or not, find him combative or just succinct and to the point, today’s post is not intended to exalt Sam Zell, but rather to steer you to a powerful collection of Zellesque music boxes:   The folks at www.CRE-Advice.com have assembled the first ever, free and online Commercial Real Estate Leadership Summit, which features industry insights, market overviews, and prognostications from close to one dozen of the commercial real estate industry’s thought leaders…it’s like having unfettered access to some of the most influential leaders in CRE on your time and in a setting of your choosing…or like pressing play on a dozen of Sam Zell’s music boxes.

I was a participant, and my video contribution appears in the video above.  You can gain access to the free summit by registering here: CRE-Advice Leadership Summit

A Strong Close to 2010

Following two years of unprecedented upheaval, commercial real estate market conditions have improved markedly over the course of 2010. In the final days of December, Real Capital Analytics reports that the rush to bring deals to closing has pushed national transaction volume for the year past the $100 billion milestone, roughly doubling the market’s tally for 2009. This improvement in property sales reflects investor confidence in the long-term prospects for our industry as well as improvements, though sometimes modest, in supporting measures of economic and job market activity.

Coinciding with rising sales volume, broad measures of property prices have also firmed in 2010. Over the last three quarters, cap rates have fallen for virtually all property types. The gulf in pricing expectations that separated buyers and sellers in 2009 has narrowed, closing the “bid-ask” spread and allowing more parties to come to agreement. More confident in market valuations than during the depths of the recession, lenders have shown increasing eagerness to make loans for high quality property sales in recent months. While many banks are drawing down their commercial real estate portfolios, the CMBS pipeline is now reestablishing itself with roughly $15 billion of securitization projected for the first quarter of the New Year…a positive combination of events, indeed.

Imbalances in the Recovery

The overarching trends show an industry on a sustainable path of recovery. But as with any recovery that is not backed by a robust economy, the last year’s gains in commercial real estate investment activity and pricing have been uneven. Similarly, mortgage-financing terms have improved in the strongest investment markets while credit too often remained constrained elsewhere. Our team is acutely aware that the headline statistics of national sales activity do not properly convey these differences across our broad array of markets.

For much of the last year, the weight of institutional investor and lender interest has favored larger deals in a small group of coastal markets. Capital inflows to these markets have been unusually concentrated, pushing prices higher. According to the Moody’s/REAL Commercial Property Price Index, based on data from Real Capital Analytics, property prices have come off their lows. In the top three markets – New York City, Washington, DC, and San Francisco – they have done much more than that, rising 38 percent since 2009. As competition for trophy assets in these markets has intensified in recent months, a handful of record-setting deals have been added to the rolls. While that is welcome evidence of the market’s improving vigor, gains in the $500 thousand to $5 million segment of the market have lagged trends for larger properties in 2010, as has investor appetite for assets in non-primary markets. This, however, is quickly changing, and secondary and tertiary markets are back on the radar screens of opportunistic investors.

At the year’s close, the transaction record shows clearly that greater momentum is building in a wider range of markets and for a more diverse pool of properties than even just a few months ago. It is with this in mind that I offer some thoughts on the outlook for 2010:

The Economy

At this time last year, I described a scenario of measured growth in 2010, characterized by slow but sustained expansion in economic activity and an eventual return to business hiring. Consistent with these projections, the economy has expanded at a modest pace over the last year. Regrettably, the expansion has been insufficient to dent our national unemployment challenge. Barring any unexpected shocks, such as that which might result from a serious deterioration of sovereign debt conditions in Europe, the outlook for 2011 is brighter. The consensus among economists and industry leaders points to a much-needed acceleration in growth in the coming quarters, supported by the extension of tax cuts and the temporary payroll tax holiday. Consumer and business confidence has improved as well, benefiting retail spending and business investment and inventory levels.

While job growth has been flat out disappointing, leaving too many American families out of work this holiday season, employment has stabilized tremendously over the last year. Key to the stabilization of commercial real estate fundamentals, employers created almost one million net new jobs in 2010. In 2009, in contrast, employers cut nearly five million jobs. While current employment trends fall far short of healthy levels, the return to even modest job growth has ended the freefall in property rents and occupancy levels that has undermined buyer confidence, sense of value, and should be viewed as a good sign. With a stronger growth potential in 2011, we can look forward to more sustained job creation and further stabilization in property cash flow. A long road lies ahead, I’m not underestimating the challenge before us, but employment is trending in a positive direction.

Investment Activity

Following December’s year-end rush of closings, activity may appear to lull in the early months of the New Year. Offering volumes and deals now coming into contract portend a sustained improvement in activity underlying these seasonal fluctuations. As for how the market landscape will evolve over the next year, several key issues now dominate the drivers of investment trends:

More Balance Across Markets

Already evident from recent transaction activity, the erosion of yields in the most visible markets is now leading investors to broaden their sights. Buyer interest in relatively smaller-scale assets and in secondary and tertiary markets is on the upswing. Of course, the outlook for property fundamentals remains a consideration for many potential investors in these markets. As a result, improvements in pricing and sales volume have clearly favored high quality assets with strong tenant rolls and limited short-term exposure to leasing risk. Assets with this level of stability, and which are located in non-primary markets are now receiving considerable attention, which is another indication of an improving market. Investor willingness to geographically diversify will increase markedly in the coming quarters.

Less Distress But More Distress to Buy

Opportunities to invest in distress have been growing in 2010 though distress sales have not been allowed to overwhelm the market. Expect this to continue. For many investors, this controlled approach to distress management by banks and other lenders has been frustrating. The availability of distressed properties in the for-sale market will continue to increase in 2011, supported by generally improving investment conditions, and lender willingness to cleanse their balance sheets. But the floodgates will not be released and prices for these assets will remain higher than during previous cycles. Note sales will continue to play an integral part in the distressed asset market, and we expect loan sales volume to increase significantly in 2011.

Rising Interest Rates

One of the emerging challenges facing the industry results from rising interest rates. Up to now, the recovery has been supported by extraordinary interventions by the Federal Reserve, an absence of inflation, and very low interest rates. This combination of circumstances has kept borrowing costs low for qualifying investors and has also eased the path to refinancing and, in distress situations, modification of loans. In recent weeks, long-term interest rates have been rising even though inflation remains subdued. Already, higher treasury rates have resulted in a rise in 30-year residential mortgage rates, dampening the outlook for housing markets. In the arena of commercial real estate, we will have to remain watchful for the impact of rising interest rates on cap rates and the impact on borrowing costs. While cap rates will not necessarily rise with interest rates, lenders may be forced to raise lending rates.

Conclusions

• Buying into the recently firmed US market now, taking advantage of low interest rates (which have nowhere to go but up) is a strategy that many astute investors will implement. This said, we will not see a “rush” of activity stemming from the newly established pricing floor.

• Given the market’s positive momentum, locking-in historically low lease rates (for 5 & 10 yr. terms) will become much more prevalent in 2011. H2 leasing volume levels suggest that this is already occurring.

• Geographic diversity and a willingness to pursue quality investments in secondary & tertiary markets (where spreads are greater, competition is weaker) is a key to re-entering the market in 2011. We will see much more of this in the year ahead – first with performing assets in secondary markets, followed by same in tertiary markets.

• As opportunities to invest in distressed assets remain less than plentiful, real property investors will look to note acquisitions with more interest. In many respects, a note purchase will continue to be the shortest path to real property ownership of troubled assets.

• 2011 will represent a calendar year of overall recovery – more balanced than we saw in 2010, but not without fits and starts.