Q&A: Will the Euro-Zone Crisis Cripple Commercial Real Estate?

Mark Battrell Photography Inc.
Jacques Gordon, of LaSalle Investment Management

With Europe in economic turmoil, Developments asked Jacques Gordon, global investment strategist, LaSalle Investment Management, what the debt crisis could mean for commercial real estate in the United States. A subsidiary of Jones Lang LaSalle, LaSalle Investment Management manages $43 billion in real-estate investments for pension funds, insurance companies, governments and individuals.

This exchange has been edited for clarity and length.

WSJ: How will the European debt crisis affect U.S. real estate?

Mr. Gordon: We expect going forward the biggest impact will be on office tenancy. It’ll be modest. We expect downsizing of European banks and financial companies on the East Coast in cities like Boston and New York.

WSJ: What about the impact on U.S. credit markets?

Mr. Gordon: As far as the ripple effect in terms of credit contraction happening here the way it’s happening in Europe, we don’t see that. There’s a very severe credit contraction going on in all industries in Europe and real estate industry is getting hit hard. Major lenders in Europe are shutting down their real estate lending desks. Very little lending is going on except for prime properties and prime borrowers. The question being, with that massive credit contraction which is almost at the 2009 level intensity in U.S. terms, would that come over here? We’ve looked at that and we don’t see that.

WSJ: Why not?

Mr. Gordon: European lenders after the financial crisis never came back here in a significant way. European lenders had a large market share in terms of 2002 and 2005 time frame. But in 2010 and 2011 they pretty much folded up shop….Also, our subprime debt was bought by German and French banks. I don’t think the reverse is true. I don’t think American lending institutions have lent to empty office buildings in Greece or condos in Madrid or Italian shopping centers. American lenders if anything got overexcited about lending here to residential but they did not get overexcited about Europe.

WSJ: Do you agree with the notion that the European debt crisis was one of the reasons U.S. real estate investment sales slowed in the second half of the year?

Mr. Gordon: I would put Europe’s problems in the top two reasons. I’d probably say our own downgrade in our government debt and concerns about U.S. debt market were also a factor. My sense is a lot of the nervousness just in the last 45 days is starting to lift again.

WSJ: Does the debt crisis pose a challenge in 2012 for top-tier U.S. markets that have relied on foreign investors for investment sales?

Mr. Gordon: I’d say no. There are other sources for money that are not European, such as Korean money and other sovereign wealth funds outside Europe. Norway is just getting started. I don’t see that the pullback of German money, which was a predominant source of investor capital, will change pricing in our iconic properties because there are other buyers. Also German international funds are still getting modest levels of investments so they do not have pressure to sell.

WSJ: Are any pockets of the U.S. real estate markets benefiting from European distress?

Mr. Gordon: The fall in the euro has helped European exports. French, German and Italian goods are coming in at levels that are almost back up to pre-2008 levels. So European occupiers of office space in U.S. may be shrinking but European providers of goods and occupiers of retail spaces may actually be increasing. It’s too early to tell if there’s going to be a real trend there but our own observation is European goods in shopping centers we run are all doing very well.

WSJ: Do Europe’s problems provide real-estate investment opportunities for U.S. investors?

Mr. Gordon: As the U.S. real estate market continues to recover….more North American investors will start to look to Europe for enhanced returns. It might not be a part of the world that’s growing but it’s a part of the world where mezzanine debt is scarce. Banks are not willing to lend more than 50%. So as loans come due, the borrower has to do something, either pay down the loan or refinance it. I think a lot of American investors are looking at that opportunity. I think it’s a good one. It certainly gives a yield that’s three or four times higher than buying the underlying real estate…The idea that Europe is an economy or civilization in perpetual decline is not correct. In the last thirty years we’ve seen a lot of positive surprises.

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