Commercial Property Execs’ Mood Brightens, Yet Outlook Clouded by Economic, Fiscal Uncertainties, Interest Rate Risks
Senior commercial real estate executives are increasingly positive about current and future market conditions—particularly as they relate to top-quality assets in top markets—yet they remain concerned about the slow pace of job creation, sovereign budget deficits (including U.S. debt challenges) and interest rate risks, according to The Real Estate’s Roundtable’s Q1 2013 Sentiment Survey.
Reflecting the industry’s gradual healing, eight percent more survey participants rated current conditions as “somewhat better” than those of a year ago (compared to the Q4 2012 survey), while 16 percent more respondents projected “somewhat” to “much” better conditions one year from now. Yet, the recovery remains “bifurcated” geographically and in terms of asset quality—with valuations, equity and capital availability recovering much more quickly in the 24/7 “gateway” markets (particularly for “Class A” real estate), as compared to B- or C-rated assets/”commodity real estate” in secondary or tertiary markets.
Although all three indices rose in the current survey, and although the survey trajectory remains positive, the index is still not back to where it was two years ago—before the 2011 debt ceiling crisis and S&P’s unprecedented downgrade of the U.S. credit rating.
Whereas the “Overall Index” hit a high mark of 77 during the first half of 2011, it now stands at 69 (up from 65 in Q4 2012). The “Current Conditions” index, which rose slightly in the latest survey (from 68 to 70), also remains somewhat stronger than the “Future Conditions” index, which increased from 62 to 67 between Q4 2012 and Q1 2013.
“As today’s survey shows, commercial real estate is on the mend, but it remains a fragile recovery very specific to property type and individual markets. It also is clearly dependent on what happens with the broader economy, policy decisions being made—or not made—in Washington, and how policymakers ultimately unwind what has been a very long stretch of accommodative monetary policy,” said Roundtable Chairman Robert S. Taubman, who is chairman, president and CEO of Michigan-based Taubman Centers, Inc.
Numerous survey participants cited concerns about potential interest rate increases, which would lead to higher mortgage payments and lower asset values—a combination that could undermine the market’s recent progress. Renewed pressure on property values would also have negative implications for local government tax revenues, bank balance sheets (particularly smaller community banks) and retirement accounts held with U.S. pension and 401(k) plans.
“The latest survey data underscore the need to accelerate U.S. job creation—still the most important metric driving property fundamentals—and the need for appropriate flows of capital and credit for commercial real estate transactions,” said Roundtable President and CEO Jeffrey DeBoer.
“To get businesses off the sidelines—expanding their plants and payrolls—there must be more predictability, certainty and balance in public policy going forward, whether the issue is promoting sustainable, secure energy sources; simplifying and restructuring our tax code; implementing financial regulatory safeguards under Dodd-Frank; or addressing the nation’s immigration problems,” he added.
The quarterly Sentiment Survey, administered by FPL Advisory Group, seeks to capture feedback from a broad range of real estate industry segments, asset classes, ownership vehicles and capital structures, including owners and operators, asset managers, and financial services firms.