I’ve been doing quite a bit of work on liquidity recently with Steve Devaney and Anupam Nanda. Poor liquidity is probably the single biggest barrier to investment in commercial real estate – albeit private equity and infrastructure are often less liquid. We’re looking at transaction activity among other things – transaction activity is not necessarily a proxy for liquidity. I’d say that they’re inextricably linked but not necessarily the same. I think that a definition and measure liquidity in real estate is a fairly complex area – for another blog post.
I had kind of known it – you see it a lot in housing markets too – but the linkage between the performance of the market and the number of deals is really striking when you see some of the actual numbers. For instance, for a sample of 36 US markets, in our database (Thank you Real Capital Analytics), there were 1356 office deals in 2007 and 190 in 2009. Falling numbers of deals and falling values of deals (strangely there seems to be little fee competition in brokerage – that too is for another blog post) in downturns must hit investment agents (brokers) REALLY hard.
I doubt that I’m saying anything that they don’t already know. When transaction activity dropped in the UK during the GFC, collectively it represented hundreds of millions of pounds of fee income for the major brokers – CBRE, JLL, DTZ, Savills etc. This must make their business revenue stream pretty cyclical too. It helps to explain some solvency issues in 2008-9. Of course it depends on how exposed they are to investment transactions relative to their other revenue streams from property and asset management, professional services, appraisal, leasing etc. Given this close link between market performance and transaction activity, it would be interesting to analyse the share price performance of the real estate services (brokerage) firms in terms of linkages to transaction activity and the performance of the private and public real estate markets. I suspect that they’re similar to a highly geared real estate fund.