The Leader - March/April 2009 - (Page 80) INDUSTRY T R A C K ER by Richard Kadzis Using the Portfolio as an Economic Hedge: A GREAT TIME FOR SERVICE PROVIDERS TO SHINE For the majority of us seeking reassurance, even recognition of a pattern, over the current state of the economy, there’s the nagging claim, “We’ve never seen anything like this before.” Uncertainty and turbulence are hallmarks of this economy turned down, and why not? After all, it’s our first look at the downside of the globally integrated economy. The CMBS-driven sub-prime ‘contagion’ drove us to the downside, debunking the notion of the “decoupling” of global regional markets, as noted recently by Kenneth Rudy, who oversees capital markets for Jones Lang LaSalle. So at very least, because the global economy surprised everyone by being more interlinked than expected, this recession feels different. Yet, as another economist points out, we have been here before, at least in one sense. “There have been about 60 economic crises since 1970, and they all follow the same pattern,” contends Dr. Marci Russell, currently a visiting professor at DePaul University and formerly an economist for CNBC and the Federal Reserve. She breaks down the historical pattern, or sequence, of economic downturns into three stages: crisis, containment and resolution. As with the housing industry, corporate real estate (CRE) recognized the crisis as early as Q4 of 2007 about the same time the recession started in the U.S. Then in 2008, commercial real estate transaction volumes fell to near-historical lows. Our industry’s supply side felt the pain early. Now we’re in the containment phase, with signs pointing to 2009 as the year the commercial property, investment and capital markets bottom out. Sale-leasebacks – along with every other type of transaction – fell off a cliff in the fourth quarter of last year. Early numbers show that sales plunged to $557.6 million, the lowest total for a threemonth period since the $376.6 million reported in second-quarter 2005.’ —COSTAR ADVISORS the day-to-day response to cost cutting and other intensified economic pressure. Containment, and eventually resolution, is also tied to the long-term agenda for CRE. “Core business strategies don’t change dramatically in a downturn,” as one global services executive observed at CoreNet Global’s recent Industry Leaders Roundtable. “Flexibility is still being heavily emphasized,” added a head of global real estate. Sure, some pieces – like the classic saleleaseback – are all but missing from the CRE toolbox in this downturn, thanks mainly to highly constrained capital, the disappearance (for now at least) of CMBS underwriting and what JLL’s Rudy calls the current negative “psychology of liquidity.” Of course, mass layoffs won’t help fill office or industrial space. And investors in commercial properties including REITs continue to wait on the sidelines for some improvements. With these and other hurdles to clear, it’s still “a great time for service providers to shine,” as the head of workplace for a major technology company suggests. The Rise of AWS on the Corporate Agenda ‘The Psychology of Liquidity’ The CRE version of containment this time around has a ring of familiarity, regardless of the different feel, depth or length of this recession. For us, containment equates to The door is open, starting with the steep uptick in the number of companies who’ve turned to their CRE portfolio as an economic hedge. Only now, the emphasis isn’t just on flexible leasing solutions. It’s 2 0 0 9 TH E LE ADE R 80 MARCH / APRIL
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