The commercial real estate (CRE) markets are in for a long, slow recovery in the face of persistently high unemployment, ongoing concern over government policy, uneven availability of capital for refinancing, and other factors dampening market activity, according to The Real Estate Roundtable's fourth quarter survey of over 110 senior CRE executives.
The overall Sentiment Index dropped by one point this past quarter, to 73, but has been on a relatively flat trajectory since the beginning of the year and appears likely to stay that way for some time.
Asked how real estate market conditions will be one year from now, fewer respondents in the fourth quarter survey said they expect conditions to be "much better," while more respondents projected only "somewhat better" conditions.
"Positive opportunities certainly exist; however, our industry overall will continue to be weak until the job market improves," said Daniel Neidich, roundtable chairman and founder of Dune Real Estate Partners. "More than anything, we need a return to hiring, which would boost consumer spending, lift occupancy levels and operating income, and begin to repair the dramatic erosion of commercial property values, which are fundamental to owners' ability to obtain debt and equity capital."
He added that this is why the group is urging policymakers to look at policy ideas through "job creating prism."
Despite signs that capital markets are slowly improving, including reports that large amounts of equity capital are "waiting in the sidelines," respondents said that there is not enough debt to fully recapitalize assets or refinance existing deals. More improvement is needed before the real estate and capital markets can be said to be functioning properly.
Looking ahead, slightly more participants in the roundtable's fourth quarter survey projected that debt and equity availability would be "about the same."
Meanwhile, fewer respondents said conditions would be worse, suggesting that capital markets will continue their slow trajectory of improvement. Still, respondents expressed ongoing concern about market fragility and the lack of financing for 'B' assets.
In addition to the estimated $1 trillion CRE equity gap caused by property devaluation and higher lender demands for equity, the CMBS market remains far from the capacity needed to refinance maturing loans.
Previously the second largest source of commercial mortgage debt after banks, CMBS issuance dropped significantly to $1.36 billion in 2009 from $230 billion in 2007.
Only recently did the market begin to recover, thanks partly to the Federal Reserve's Term ABS Loan Facility or TALF, respondents said.
However, problems remain, partly resulting from pending securitization regulations required by the Dodd-Frank Act and new accounting standards requiring issuers to keep securitization and associated risk on their balance sheets as a result of FAS 166-167.
A Fed report on Oct. 19 concluded that the "cookie-cutter" approach to "risk retention" in Dodd-Frank will not help revive financial markets, and could ultimately reduce credit availability.