Uncertainty About Post-Election Policies Tempers Outlook for Commercial Real Estate, Economic Growth in Q4 2012
CRE Execs Forecast Sluggish Recovery for Non-Gateway Markets
(WASHINGTON D.C.) — Uncertainty over how the national elections will impact the next Administration’s approach to domestic economic policies, along with a host of global challenges, tempers commercial real estate executives’ market outlook for the remainder of 2012, according to today’s Q4 Sentiment Index released by The Real Estate Roundtable. (Download pdf of the full report)
“In the wake of the Presidential and Congressional elections, industry leaders await how the results will translate into public policies that need to quickly address the nation’s economic woes, respond to potential slowdowns in Europe and Asia and generate economic growth in commercial real estate markets outside core ‘gateway’ areas,” Roundtable President and CEO Jeffrey DeBoer said. “With our economy perched on a fiscal cliff, there is a state of high expectation in the business community, which is reflected in the relatively flat Q4 Sentiment Index when compared to the previous quarter.”
The survey’s “Overall Index” now stands at 65 – up two points from Q3 2012 and six points compared to Q4 2011. This quarter’s Index indicates that respondents see the commercial real estate industry on a generally favorable incline and expect slightly improved market conditions during 2013. The overall score is based on the average of two indices – the Current Conditions Index (68 for Q4 – up 4 points since Q3) and the Future Conditions Index (62 for Q4 – unchanged since Q3). Figures above 50 indicate a positive market trajectory.
Although general Sentiment remains positive, many survey respondents expect a slow economic recovery for 2013. Sixty-six percent of respondents in Q4 said real estate market conditions were “somewhat better” or “much better” than one year ago – compared to 60 percent who responded the same way in Q3. A slight uptick also registered from those respondents who believe real estate market conditions will improve next year. A survey participant stated, “Slower growth is expected. Shocks from Washington’s dysfunction are the most significant risk over the next 3-6 months.”
For asset values, survey participants see an improvement today compared to one year ago, and expectations are that values will increase further next year. However, respondents caution that asset value increases are not spreading beyond prime assets in core “gateway” commercial real estate markets. As one industry leader noted, “Prices are slowly getting higher today, driven by a growing underpinning of interest, and therefore valuation, of some real estate. There has been a small amount of appreciation at the core end of the market, but nothing fundamentally.”
Roundtable President and CEO Jeffrey DeBoer noted, “In the wake of the Presidential and Congressional elections, industry leaders await how the results will translate into public policies that need to quickly address the nation’s economic woes, respond to potential slowdowns in Europe and Asia and generate economic growth in commercial real estate markets outside core ‘gateway’ areas.”
Capital market conditions also reflect a bifurcated market, with both debt and equity availability available for top tier assets. The majority of respondents believe current conditions for both debt and equity are better than those of a year ago, while forecasting that financing will improve even more next year. One commercial real estate industry respondent commented that “There is plenty of equity and debt, and market participants have a reasonable ability to get both in good locations and good cities. It is difficult to find good pricing and on debt for any type of B property.”
During The Roundtable’s recent industry meeting, Roundtable members also shared their concerns about the ongoing implementation of the Dodd-Frank Act, in particular pending regulations governing the commercial mortgage-backed securities (CMBS) market such as implementation of the 5% “risk retention” rule. Another regulatory policy issue of concern is the proposed Volcker Rule, which seeks to bar proprietary trading by banks but could unintentionally impede real estate capital formation. International issues also of significant concern that were discussed included the ongoing debt crisis in Europe and the increased capital reserve requirements imposed by the Basel III capital accord – particularly with respect to community banks, which hold the bulk of distressed commercial real estate loans on their balance sheets.
Roundtable President and CEO Jeffrey DeBoer noted that these concerns are also reflected in today’s Sentiment Index. “Our Q4 report clearly shows the industry is anxious to learn how Congress and the next President will avoid potential double-barreled damage from allowing sudden, enormous budget cuts as part of the ‘sequestration’ process take effect as many current tax incentives expire. As the industry braces for whatever comes next, The Roundtable will continue working with national real estate trade groups to encourage a more robust recovery of the CMBS market, which will ensure a broader recovery in commercial real estate markets while strengthening financial institution balance sheets.”
The quarterly Sentiment Survey seeks to capture feedback from a broad range of real estate industry segments, asset classes, ownership vehicles and capital structures, including owners and asset managers, financial services firms and operators.
A pdf of the entire Q4 2012 report is available here. The next Sentiment Survey will be released in late February covering Q1 2013.
The Roundtable's 2012 Policy Agenda is available here.
About The Real Estate Roundtable Sentiment Survey
The Real Estate Roundtable Sentiment Survey is the industry’s most comprehensive measure of leading real estate executives’ confidence in financial and real estate markets. The survey, conducted by FPL Advisory Group, captures the perspectives of senior real estate executives, including CEOs, presidents, board members, and other executives from a broad set of industry sectors including owners and asset managers, financial services firms and operators.
About The Real Estate Roundtable
The Real Estate Roundtable brings together leaders of the nation’s publicly-held and privately owned real estate ownership, development, lending and management firms with the leaders of national real estate trade associations to jointly address key national policy issues relating to real estate and the overall economy. Collectively, Roundtable members' portfolios contain over 5 billion square feet of office, retail and industrial properties; over 1.5 million apartment units; and in excess of 1.3 million hotel rooms. Participating trade associations represent more than 1.5 million people involved in virtually every aspect of the real estate business.
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