Real
Estate CEOs Predict Long Road to Recovery
Key
Concerns Remain Jobs, Interest Rates and Maturing Debt
Amid signs of a stuttering recovery, senior real estate executives report
that declining
fundamentals
and deterioration in Net Operating Income (NOI) pose formidable challenges
to the commercial real estate sector encompassing office buildings,
shopping malls, warehouses, hotels, and apartment buildings according to
The Real Estate Roundtable's 1st quarter 2010 Sentiment Index.
"Our industry urgently needs public policies that will drive job growth in
the economy. We need policies that will facilitate equity investment in
real estate. And we need policies that will restart a secondary market to
help banks clear their balance sheets of toxic assets while encouraging
greater lending to credit worthy borrowers, both large and small,"
Roundtable President and CEO Jeffrey DeBoer
said. "The sense of overall gloom that prevailed one year ago has eased.
Credit markets have thawed somewhat and that is obviously good. However,
there is a long road to recovery ahead and policy uncertainty only makes the
road more difficult to travel," DeBoer added.
The
Roundtable's latest Sentiment Index (now at 73, up from 63 in the previous
quarter) shows an industry just beginning the process of pulling itself out
from the depths of the deepest real estate downturn seen in a generation.
The Overall Sentiment Index is calculated based on averages of Future and
Current Indexes all measured on a scale of 1 to 100. To reach an Overall
Index of 100, for example, all survey respondents would have to answer that
conditions are "much better" today (Current Conditions) compared to one year
ago, and will also be "much better" 12 months from now (Future Conditions).
The
Sentiment Index indicates that confidence in market conditions may be on the
mend, yet industry leaders remain guarded in their improved outlook. The
Current Conditions Index, which measures market conditions today versus one
year ago, came in at 69, a 13 point increase from last quarter's sentiment
reading. The Future Conditions Index, which measures market conditions today
versus one year from now, came in at 77, an increase of seven points from
the 4th quarter of 2009.
A
common concern among the 110+ survey respondents is the impact of declining
fundamentals and deterioration in NOI. As one CEO commented, "There are 20
million or more people who are underemployed or unemployed. Businesses are
being very cautious. The federal government is considering raising taxes.
All of this is causing uneasiness." Another executive added, "Things will
be slow to recover because economic growth and jobs take time. Jobs drive
fundamentals."
Survey participants also noted that if interest rates are raised now to
counter inflationary pressures, it would undermine the conditions needed for
economic recovery. Many participants said they expect lenders to continue
loan extensions to avoid forced sales, particularly for high quality assets
wallowing in a distressed market. Yet with hundreds of billions of dollars
of commercial real estate debt maturing annually over the next several years
and limited ability to refinance on the horizon many respondents said
the deleveraging process necessary for an economic rebound has been delayed.
DeBoer noted, "The volume of commercial real estate transactions is anemic.
Transaction volume is down more than 90 percent compared with 2007. The
scarcity of transactions feeds on itself as value determination is made more
difficult and lenders are more reluctant to extend credit. Policy actions
that facilitate equity infusions, particularly from global capital sources,
would help spur transaction volume and assist in deleveraging maturing
debt."
Perhaps the biggest reason for the positive change in sentiment this quarter
is an improved outlook on capital markets. Approximately two-thirds of
respondents said capital for both debt and equity is more accessible now
compared to one year ago, during the height of the financial crisis. Of all
survey respondents, 83% predicted an increased availability of debt capital
in one year, while 75% said there would be an increase in available equity
in one year. As the report notes, while this sentiment is a good sign for
2010, it also indicates that there is still a long way to go before market
conditions can be qualified as "back to normal."
Some respondents also said asset values may be close to bottoming out. The
report shows 45% expect real estate asset values to increase in the next
year, while 35% expect them to remain flat, and 19% predict further
declines. "The free-fall in pricing has stopped," said one interviewee,
adding, "Values are going to stay along the bottom through 2010." Another
participant reiterated this view, saying, "In terms of valuations, we're at
the 'muddle through' point, with fundamentals continuing to provide downward
pressure."
DeBoer and The Roundtable have been championing a multi-pronged plan to
attack the liquidity crunch afflicting the markets. "Just as there is no
single cause of the financial crisis, there is no single solution no
'silver bullet' to address the mammoth refinancing challenges in
commercial real estate," said DeBoer. "As President Obama emphasized the
need for job creation during his State of the Union address last week, we
agree that generating sustainable jobs is a top policy priority. At the
same time, we remain vigilant in ascertaining market conditions, while
urging policymakers to encourage stable asset valuations, enhanced
transparency and sensible underwriting practices all key factors for the
return of a reliable credit system," DeBoer added.
A
.pdf of the entire report is available on The Roundtable's website at
www.rer.org. The next Sentiment Survey will be released in April
covering 2Q 2010.
