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From Colin Dyer’s perspective, the worldwide real estate market is in pretty bad shape. As president and CEO of global real estate services firm Jones Lang LaSalle, Dyer has seen firsthand the problems that an absence of liquidity is causing for buyers who need financing for real estate transactions. Yet he is also optimistic that comparatively little competition and some good bargains provide excellent market opportunities for those who know where to look. Dyer expanded on these points during an interview with Knowledge@Wharton.
An edited transcript of the conversation follows.
Knowledge@Wharton: Our next guest is Colin Dyer, president and CEO of global real estate services firm Jones Lang LaSalle. Thank you so much for joining us today.
Colin Dyer: It’s a pleasure.
Knowledge@Wharton: The question on everyone’s minds these days is the world financial crisis and its impact on real estate. Could you tell us how you see the downturn affecting the U.S. market and also emerging markets?
Dyer: The real estate markets worldwide, up until about the middle of 2007, were remarkably aligned or synchronized in the sense that almost everywhere rental rates were rising, vacancy rates were very low. The fundamental supply-demand situation was healthy. There had not been a huge burst of development in construction as we had seen in previous cycles. Again, I generalize. But we saw that picture worldwide in the leasing markets, in the rental markets. And in the capital or investment sales market, it’s the same picture. Lots of money had flown into real estate and returns were at historical low levels. We saw a remarkable degree of alignment of cap rates or yields around the world.
In the middle of 2007, the initial phases of the liquidity crisis, which started of course in the U.S., very rapidly spread to Europe and, within six months, had hit Asia. So by the end of 2007, we had a situation where the confidence and liquidity from lending institutions coming into the real estate market had ebbed away, and we saw rates of decline in the volume of transactions and in pricing. Where we are now in those investment sales markets are that transactions are probably down 50% to 60% from their peak levels in volume terms — dollars transacted — and pricing is down between 20% and 30% and even more in some areas…. As a result, rates of return from real estate have risen.
And where that leaves the world of investment sales is it could become very illiquid. There is … a big gap between the bid and the ask prices on the few transactions that are in the market and we see very low levels of the current transactions.
By the way, that again is showing remarkable alignment around the world in terms of the drops in pricing and the levels of transactions.
Knowledge@Wharton: Since Jones Lang LaSalle has global operations, you probably have an inside view of a lot of different markets. Which markets do you find are most vulnerable and which ones are relatively strong?
Dyer: We are in 60 countries around the world with our advisory work and we run around $55 billion of funds for institutions or in commingled funds, again, invested around the world. So we have a pretty good picture of what is going on worldwide. The bad news is there are really no markets that are in good shape at the moment. This absence of liquidity means that it is very hard for buyers to assemble the necessary financing to transact to buy real estate. And even if they are prepared to finance a purchase themselves on an all equity basis — and there are sovereign wealth funds, there are government funds from oil countries, there are insurance institutions and other institutions who are prepared to invest on an all equity basis — nevertheless, even if they have the funds, [there is] very little visibility of pricing. The level of transactions has become so comparatively low that it is really difficult for investors to know what real pricing levels should be in any particular market. So we have this worldwide picture.
Now, the interesting news, and the potential opportunity in all of this, is whether you are intent on investing in New York, Paris, or Mumbai. There are immense opportunities emerging for purchasing assets or portfolios of assets or even buying into listed vehicles such as REITs in the various countries around the world where they are traded. There are enormous opportunities coming up for buying assets at historically low levels at very attractive rates of return. And in the course of ’09 we expect to see this, you might call it ‘stress market’, open up and become much more liquid.
Knowledge@Wharton: Is it your sense that values have hit bottom so that buying opportunities exist right now, or might they become more attractive in the future?
Dyer: It is very hard to call the bottom of the market and you can argue that it is actually not that important to hit exactly the bottom. The important thing is that if you are a fund or a private individual or a sovereign wealth fund, if you see assets which are available at prices which meet your long-term return requirements, this is an excellent market in which to be doing it — the more so because there is comparatively little competition for assets which are for sale. So buyers can take their time. There is not a lot of competing bids to be concerned about. I would not say they can dictate terms, but obviously they have a lot of leverage in negotiation.
We are seeing situations — indeed, our own funds have started to buy in the London market — where prices have declined for slightly longer and actually dropped slightly faster than many other markets simply because it started declining six months prior to the rest of the world-liquidity crisis hitting. And [with] yields or cap rates of between 8% and 9%, we are seeing very attractive, very high quality assets at prices which are perhaps available only once in a generation. Our funds — and we see other investors doing the same thing — are taking the opportunity to buy in with comparatively little competition.
[Whether] prices fall another 5%, another 10%, does not really matter when the horizon for the investment is five years or more and that will be recouped over that period of time.
Knowledge@Wharton: Could you give any examples of attractive assets that have gone through such deals? And assuming one did find some attractive assets to acquire, given the state of the liquidity situation, where would the capital come from to finance these deals?
Dyer: The capital is available. I mentioned a couple of sources: oil, fuel, sovereign wealth funds, pension funds with a constant inflow of money which they have to allocate, and indeed very many of the funds, such as our own, which were raised for investment in real estate during 2006 and 2007, but which the fund managers never got around to investing or did not do so fast enough or did not find pricing attractive. A lot of that money is still available, it is waiting and it is ready to be invested. So, paradoxically, some of these funds which might have been aimed at investing in core assets have now turned into opportunity funds because they will be able to take advantage of the sort of resources I have been describing.
There are examples, not a huge number, but there are examples in all countries in all asset classes where one finds sellers who are sufficiently motivated — and that means under sufficient pressure just at the moment –to have to sell. We are working with buyers with funds and seeking out those sorts of opportunities. But they are available internationally and they are available across all asset classes. There are beginning to be a significant number of motivated sellers out there and that is good news.
Why are they motivated? Pressure of financing, cash flow issues, development projects that cannot be completed for reasons of an absence of continued funding — all sorts of reasons for that happening. Those opportunities are beginning to crystallize now. We think in the course of 2009-2010, there will be some excellent investment opportunities.
Now turning to the occupier side, we are working with our corporate clients who largely lease real estate for their own use. We are working with them to examine the space needs, often renegotiate, reassemble leases, change the terms so that they can get a longer term on a lease to secure the space for a longer period of time. We are finding that those sorts of dialogues with landlords are very productive. Landlords are very open to this.
Knowledge@Wharton: Given what you said about the state of the markets and the opportunities, how do you see Jones Lang LaSalle’s strategy going forward for the next 18 to 24 months?
Dyer: Our job is to service our clients’ needs. As our clients’ needs change, we of course adjust the emphasis of our business model. Currently our activity in capital markets, investment sales, have fallen significantly and the third quarter numbers that we have announced are [on] the order of 50% to 60% down on prior years worldwide.
On the other hand, our work with advising investors and corporations on their real estate needs is up significantly. We have taken significant market share in the leasing market, both for owners and users of space. But the biggest boom we are seeing is in the outsourcing by companies of their real estate management needs … be it managing the space or renegotiating lease contracts around the space that they are using.
Why are corporations doing that? Well, it is similar to the trend you see in IT outsourcing. It is putting out their real estate servicing needs to specialist providers who can do it more efficiently and therefore lower costs. At this particular period of the economic cycle, the companies are out to save money. hat is obviously an attractive prospect and professionals such as ourselves are seeing good growth in real estate outsourcing by companies.
So, we are seeing adjustments in the emphasis of our business mix and we are responding to that by staffing up in some areas and staffing down in others. Where we can we are transferring people between departments to meet clients’ needs.
Knowledge@Wharton: Colin Dyer, thank you so much for speaking with us today.
Dyer: A pleasure.