U.S. commercial real estate likely to continue 'bifurcated' recovery in the coming year, with top urban markets outpacing those of secondary, non-'gateway' markets: Real Estate Roundtable Q2 survey
May 4, 2011
– Absent strong improvement in U.S. job markets and demand for business space, the nation's commercial real estate sector will likely continue its slow, "bifurcated" recovery over the coming year — with top urban markets outpacing recovery in secondary, non-"gateway" markets, according to The Real Estate Roundtable's latest quarterly "Sentiment Survey" of senior commercial real estate executives.
The Overall Sentiment Index for Q2 was unchanged since the last quarter at 77; however, the inversion of the Future and Current indices suggests a moderating, though still positive, trend. [The Sentiment Index is measured on a scale of 1 to 100. To reach an Overall Index of 100, all 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).]
"It's all about jobs," said Roundtable President and CEO Jeffrey DeBoer. "Individual segments of the market may be recovering, but until private sector job creation picks up, we will not be out of the economic danger zone. The huge pipeline of maturing commercial mortgages and large fiscal issues facing state and local governments are additional 'headwinds' that could impact recovery in the broader economy and commercial real estate. The flatter trajectory we're seeing in the Q2 Sentiment Index is a reflection of these ongoing economic risks and uncertainty."
Asked how commercial real estate markets are faring today vs. one year ago, 31 percent of the Q2 respondents said conditions are "much better" (vs. 25 percent in Q1); there was also a slight uptick (2 percent) since the last quarter in those saying conditions are "somewhat worse" than a year ago. Fewer respondents in the Q2 survey said conditions are "somewhat better" or "about the same."
Anecdotally, respondents pointed to a "market that is (generally) healing" and "definitely stronger than a year ago" — with "lots of activity chasing core [well located, well leased]" assets, especially in markets such as New York, Boston and Washington, D.C. At the same time, there were concerns about the economy remaining fragile, "fundamentals remain[ing] challenging in most markets," the sustainability of current conditions, global crises and instability, and interest rate policy.
"The real problem is that no one knows if the mending of the economy will happen in a way that allows you to be successful with the investment strategies you're using right now," said one survey participant. Another noted that "interest rate increases could have a dramatic impact on pricing, especially if they precede job growth."
Roundtable members offered similar perspectives in a recent exchange with Fed Chairman Ben Bernanke — noting the need for strong economy-wide job creation, policy action to spur foreign equity investment in U.S. commercial real estate, and continued low interest rates to foster recovery in areas beyond the top gateway markets. Several members also expressed concern to Bernanke that rising interest rates could complicate efforts to refinance hundreds of billions of dollars in maturing commercial mortgage debt.
Looking out one year, the Q2 survey data suggest a flatter trajectory — with no change in the number who expect conditions to be "much better" one year from now vs. today; 5 percent fewer saying conditions will be "somewhat better;" and 4 percent more saying conditions will remain "about the same."
Similarly, respondents said they expect asset values to continue to rise, though few expect dramatic movement in the coming year. There was also a sense among those polled that capital is materially more available, although expectations for the future are moderating slightly.
Although U.S. policymakers have taken extraordinary measures in recent years to calm financial markets, prevent the collapse of major institutions and encourage credit to flow again throughout the economy, new tax policies and other federal actions are needed before commercial real estate returns to a more typical marketplace.
"Congress needs to help bridge the massive 'equity gap' between today's diminished property values — particularly in second-tier markets — and the high levels of debt that must be refinanced and paid off," said DeBoer. "Policy action is also needed to make the nation more competitive on a global level. Until that is achieved, industry optimism will remain dampened due to economic weaknesses that remain far from resolved."
More than 110 executives from the commercial real estate sector — representing the office, retail, warehouse, hospitality and multifamily (apartment) segments — responded to the Q2 Sentiment Survey, conducted on The Roundtable's behalf by FPL Associates. A PDF of the entire Q2 survey report is available online at www.rer.org.
SOURCE Real Estate Roundtable