Commercial sales jump locally in 2010. Carpe Diem. Time to buy..

— Local commercial property sales rebounded in 2010, a trend that's continuing this year amid an improved economy and lending climate.

Sales of Chicago-area commercial properties totaled nearly $5.1 billion last year, a 164% gain from 2009, according to Real Capital Analytics Inc., a New York-based research firm. Investors have become especially aggressive bidding up prices of trophy properties like the Hyatt Center, a 49-story West Loop office tower that the Pritzker family sold for $625 million in December.
“For the best assets in Chicago, I've never seen more fierce competition than right now, including 2006-2007. It's amazing,” says Dan Fasulo, a managing director and head of research at Real Capital Analytics.
Deep-pocketed institutional investors, real estate investment trusts and equity funds came charging back into the market last year, tempting some owners of big high-end properties to sell out.
At the same time, activity is picking up at the bottom of the market, as more lenders unload distressed properties at steep discounts. Brokers chatter that buyers today either want “trophies or trash.”
The most dramatic sales surge occurred in the office sector, where the 46 properties sold represented more than double the transactions that took place in 2009. Volume, which jumped from $493.6 million to $2.7 billion in 2010, surpassed 2008's total of $2.2 billion and accounted for more than half of all commercial property sales in Chicago last year.
In addition to Class A downtown properties like the Hyatt Center, the total included a vacant 209,000-square-foot office building in Rolling Meadows that Chicago-based Imperial Realty Co. bought for $4.5 million, about 15% of the outstanding debt on the property.
Fewer Chicago-area apartment properties sold last year — just 20, compared to 47 in 2009. But a few big deals helped push the dollar volume of transactions up by 84%. In the biggest local apartment deal in the past three years, J. P. Morgan Asset Management paid $182 million for a majority stake in the 474 apartments and other commercial space in the Aqua near Millennium Park, one of the most expensive apartment buildings in the city.
The apartment market is the healthiest real estate sector by far, one reason prices have surged over the past year. But with occupancies and rents continuing to rise, some landlords are reluctant to give up future income growth for a quick cashout.
“A lot of people are indecisive as to whether they'll sell or hold,” says Mark Stern, a senior vice-president with Waterton Associates LLC, a Chicago-based apartment investor.
Sales of Chicago-area warehouses and manufacturing facilities lagged behind other commercial property types, posting just an 8% increase by volume year over year.
Amid rebounding prices, first-year returns, or capitalization rates, on local properties fell for each of the four main property types, dropping by as much as 150 basis points for office properties. As values increase, lenders are dispensing with “pretend and extend” tactics and bringing more properties to market. Mr. Fasulo says the wave of distress that has plagued the market has finally subsided and predicts loan resolutions will significantly outnumber any new distress going forward.
While lenders remain cautious about real estate, the availability of debt to finance property acquisitions continues to increase, and interest rates remain extremely low. The big question is interest rates, and what happens to sales volume if they jump.