WASHINGTON, DC - With commercial real estate market conditions showing partial signs of recovery, The Real Estate Roundtable's Q1 2012 Economic Sentiment Survey reveals that industry executives' expectations for growth this year are improved, but hindered by concerns about underlying macroeconomic and political risks.
"The expectations of leaders in commercial real estate for 2012 are tempered by the whipsaw of last year's experience, when the shocks of possible default in Europe and political gridlock in Washington led to continued economic and regulatory uncertainty. Those worries continue," Roundtable President and CEO Jeffrey DeBoer said. "Although there are hints of cautious optimism in our Q1 Sentiment Index on some asset values, there is significant concern about a wave of commercial loan maturities approaching over the next several years. Industry leaders are anxious about how it will be possible to refinance and conduct transactions as many markets continue to struggle with slow job growth. The industry needs to see as much equity capital as possible enter the market to recapitalize properties throughout the country. It is imperative that policymakers adopt measures now that will encourage increased equity investment."
Roundtable Chairman Daniel M. Neidich (CEO, Dune Real Estate Partners) added, "The fact is that commercial real estate faces continuing pressure from underlying economic problems – weak job creation, erosion of equity throughout much of the country and a massive amount of loans coming due. On top of these conditions, the commercial-backed securities (CMBS) market continues to struggle. What this Sentiment Survey shows, and our 2012 Policy Agenda supports, is that specific policy steps must be taken to bolster employment, business investment and economic certainty."
The Roundtable's Q1 2012 Overall Sentiment score is 68 – up nine points since Q4 2011 – indicating that survey respondents see the commercial real estate industry on a more favorable slope and expect slightly improved market conditions sometime during the coming year. The overall score of the Sentiment Index is based on the average of two indices – the Current Conditions Index (66 for Q1) and the Future Conditions Index (70 for Q1). Figures above 50 indicate a positive market trajectory.
[Note: the Sentiment Index is measured on a scale of 1 to 100. To reach an Overall Index of 100, for example, all of the survey respondents would have to answer that market metrics are "much better" today (current conditions) compared to one year ago, and also will be "much better" 12 months from now (future conditions).]
The Q1 survey results and interviews with leading industry executives highlight the belief that commercial real estate market conditions have seen stabilization at a low level. The survey results also report that the participants believe the road to recovery is a long one.
One industry CEO, predicting slow growth hindered by underlying risks, stated: "This year is beginning to feel a lot like a re-run of Groundhog Day. Even though 2011 is now behind us, much of the uncertainty that characterized the year has carried over into 2012. Despite encouraging signs of recovery, much like this time last year, a number of threats persist that could derail improvement."
The survey also showed industry executives expect a narrow growth in asset values. Only six percent of survey respondents said they expect a decline in values in 2012. Of the remaining 94 percent, nearly 60 percent of respondents expect an increase, while the others remained neutral. A resonating concern about property values among respondents revolves around the frailness of lower profile assets, especially in non-gateway cities. It should also be noted that the multifamily space is seen by participants as a sector apart in many ways – with its own, more positive, economics and pricing.
The survey results also suggest continued improvement in capital markets, across both equity and debt. More than half of the survey respondents indicated they see growth on both fronts, yet many reported both equity and debt becomes increasingly difficult if ideal asset and market conditions are not met.
Respondents also noted that the absence of a robust CMBS market continues to be felt. "CMBS is coming back, but slowly," said one CEO. "Without CMBS, leverage levels are much lower and it's hard to imagine that we'll get the debt overhang refinanced." As another said, "There's an enormous amount of CMBS maturing this year and next. Without a CMBS market that can refinance that, it will be putting pressure on other sources of debt capital."
More than 100 executives from the commercial real estate sector – encompassing office buildings, shopping malls, warehouses, hotels, and apartment buildings – responded to the latest Sentiment Survey. A PDF of the entire Q1 2012 Sentiment Survey Index is available online at www.rer.org