Commercial Real Estate Outlook Dims Amid Persistent Economic, Political Concerns, Roundtable Survey Shows
Outside Core Markets and Multifamily, Pricing and Capital Access Remain Flat
(WASHINGTON D.C.) — Commercial real estate market and capital conditions appear to have weakened again and are not expected to improve much over the coming year, except for pockets of strong activity and price appreciation in core “gateway markets” and the multifamily (apartment) segment, according to The Real Estate Roundtable’s Q3 Sentiment Survey, released today. (Download pdf of the full report)
The Real Estate Roundtable's Q3 2012 Economic Sentiment Index reveals that commercial real estate executives believe conditions are not expected to improve much over the coming year, except for pockets of strong activity and price appreciation in core “gateway markets” and the multifamily (apartment) segment.
Whereas an overwhelming 74 percent of Q2 survey participants judged current conditions to be at least somewhat better than a year earlier, only 60 percent expressed such views in the latest survey. Looking ahead, the percentage of commercial real estate executives who expect conditions to be better one year from today dropped from 69 to 58 between Q2 and Q3.
“Our latest survey underscores the fragility and unevenness of the commercial real estate recovery — which closely tracks the pace of the broader U.S. economic recovery and which remains limited to top-notch assets in major metro markets,” said Roundtable President and CEO Jeffrey DeBoer. “Given the pervading sense of uncertainty hanging over the economy, the elections, looming budget and tax issues awaiting action on Capitol Hill, increasingly complex and overlapping regulatory burdens, and escalating worries about the Euro zone, it’s not surprising that commercial real estate executives’ expectations for the year ahead are relatively lackluster,” he added.
Reflecting renewed economic and political concerns, all three indices in The Roundtable’s Sentiment Index fell since the last survey, conducted in April. The overall index, which early this year began to rebound from a sharp drop in late 2011 (rising from 59 in Q4 2011 to 68 and 70 in the 1st and 2nd quarters of 2012), slid to 63 in the latest survey. Similarly, the “current index” was on a positive trajectory in the first half of 2012, rising from 66 to 71 in Q 1 and Q2, respectively — only to fall back to 64 in the latest survey.
The hints of cautious optimism that emerged in the January-February survey (producing a “future index” value of 70) began to evaporate by mid-year, when the Federal Reserve downgraded its projections for U.S. economic growth after three consecutive months of disappointing jobs data. With CRE executives recalling last year’s economic roller-coaster and expressing concern about a potential repeat of similar shocks this year, the future index tumbled from 70 to 69 to 62 over the first three quarters of this year.
“Commercial real estate continues to face pressure from underlying economic problems, along with an erosion of property values and equity throughout much of the country, and a massive amount of loans coming due,” DeBoer said. “This survey confirms that policy action is needed to restore a climate for job creation, to spur long-term business investment, and to help bridge the equity gap hindering the refinancing of hundreds of billions in maturing commercial mortgages.”
Roundtable President and CEO Jeffrey DeBoer noted, “This survey confirms that policy action is needed to restore a climate for job creation, to spur long-term business investment, and to help bridge the equity gap hindering the refinancing of hundreds of billions in maturing commercial mortgages.”
In The Roundtable’s view, foreign capital represents a significant potential source of equity that could help “re-equitize” commercial real estate and rebalance “underwater” loans, thereby easing borrowers’ ability to get new financing and avoid potential default or foreclosure. But, as DeBoer testified before Congress last summer, an arcane and discriminatory tax law — the “Foreign Investment in Real Property Tax Act of 1980” (FIRPTA) — is unnecessarily impeding foreign equity investment in U.S. commercial real estate. As a first step toward reform, The Roundtable urges administrative repeal of a 2007 IRS notice that significantly expanded the law’s scope.
The Roundtable also continues working with national real estate trade groups to encourage a more robust recovery of the commercial mortgage-backed securities (CMBS) market, whose roughly $32 billion in projected issuance for 2012 is a far cry from the $230 billion issued at the market’s peak in 2007. Given that CMBS debt is used across the United States to finance “Main Street” real estate, a healthy secondary market for commercial mortgages will not only ensure a broader recovery in commercial real estate markets, but it will strengthen financial institution balance sheets across the board.
In the latest Sentiment Survey — on both debt and equity availability — fewer respondents (than in the Q2 survey) saw current conditions as better than those of a year ago; there was a corresponding increase in the percentage of respondents who felt debt and equity conditions were about the same or somewhat worse than a year ago (Q3 2011). As for future conditions, there was a similar drop in the percentage of respondents who expect better conditions one year from now — with a corresponding increase among those who expect little change (or slightly worse conditions) by this time next year.
A similar dynamic appeared on questions regarding future expectations about asset values. Specifically, there was a 16 percent decline (from Q2 to Q3) among survey respondents who believe property values will increase at least somewhat by this time next year, and an 18 percent increase among those who believe prices will stay about the same or worsen somewhat.
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 Q3 2012 report is available here. The next Sentiment Survey will be released in late October covering Q4 2012.
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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