Roundtable Survey: Sentiments of CRE Execs Are Better, But By No Means Good – Real Estate Matters
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Roundtable Survey: Sentiments of CRE Execs Are Better, But By No Means Good

Gloom Has Subsided and Confidence Is Slowly Returning, But Recovery Will Be Long and Rocky

 By Randyl Drummer

February 10, 2010



The outlook of commercial real estate executives interviewed by the Real Estate Roundtable for its first-quarter Sentiment Index can pretty much be summed up by two responses: “We’re at least a heck of a lot better off now than we were a year ago,” and “Things will be slow to recover because growth in the economy and jobs takes time. Jobs drive fundamentals.”

A year ago, as the industry looked at the smoldering wreckage of the financial crisis and its key players, the Roundtable’s overall Sentiment Index — a combination of executives’ feelings about present and future conditions — stood at 38. The first-quarter 2010 index is up to 73, which is also an increase over the fourth quarter’s 63.
While the index shows that confidence in market conditions may be on the mend, the more than 110 industry leaders interviewed for the survey remain guarded in their assessments of the halting recovery, noting that occupancies, rents and other fundamentals are still declining and net operating income (NOI) continues to erode for office buildings, shopping malls, warehouses, hotels, and apartments.

Roundtable President and CEO Jeffrey DeBoer called for government and bank policies that will drive job growth and equity investment in real estate and restart the secondary market by encouraging asset value stabilization, market transparency and clearer underwriting practices that will help banks unload distressed assets from their books and resume lending to both large and small businesses.

“The sense of overall gloom that prevailed one year ago has eased. Credit markets have thawed somewhat and that is obviously good,” DeBoer said.

Many respondents said an interest rate hike to ward off inflation would undermine the recovery. Others predicted that lenders will continue to extend loan maturities to avoid forced sales and foreclosures, particularly for high-quality assets struggling to perform in the distressed market with little ability to refinance.

“Any asset that can service a reasonable portion of the debt will get time. Banks remember the mid ’90’s when private equity firms got rich off of them,” one executive noted. Class B assets are more likely to come to market as “sellers capitulate because they don’t want to carry negative cash flow.”

But feelings were mixed on that front, with many noting that the “extend and pretend” policy has delayed the deleveraging process necessary for a pricing and market recovery.

“There is a long road to recovery ahead and policy uncertainty only makes the road more difficult to travel,” DeBoer said.

Transaction volume remains anemic — down more than 90% compared with 2007 — which is turn makes valuation difficult and lenders more reluctant to extend credit.

Some industry leaders feel that the price bottom may be near, with 45% of survey respondents expecting asset values to rise in the coming 12 months. On the other hand, another 35% expect them to remain flat, with 19% predicting further declines. For the first time since this study began in 2008, more people have predicted an increase over the next 12 months than a decrease. But few are expecting a quick rebound.

“The free-fall in pricing has stopped, but values are going to stay along the bottom through 2010,” said one interviewee. “We’re at the ‘muddle through’ point, with fundamentals continuing to provide downward pressure,” said another.

Those expecting growth are also cautious: “Capital market improvements should suggest stability in pricing at least, maybe even some appreciation, but I certainly wouldn’t bet on huge appreciation in 2010.”

About two-thirds of respondents said both debt and equity capital is more accessible now than a year ago, not surprising, given last year’s low baseline at the height of the credit crunch.

“There is more competition on debt. Not much, but enough to tighten spreads,” said an interviewee about the debt market. “One year ago there were no life companies; now there are 40 to 50 in the market. One year ago it was 50-55% [loan-to-value], and now we’re at 60-65%. One year ago there was absolutely zero CMBS activity; at least now there is some activity.”

On the equity side, executives saw the success of public REITs in raising capital as a positive, though fundraising continued to be more difficult in the private market. However, one private equity CEO said “at least investors have climbed out of the short-term perspective and are now seeing things in a longer-term light.”

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