WASHINGTON, DC - 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.
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 over 100 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.
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.
Source: The Real Estate Roundtable