Commercial Real Estate Market Recovery Leads to Uncertain Outlook Among Industry Leaders
Q2 Survey Shows Modest Optimism Mired in Political and Interest Rate Concerns
WASHINGTON, May 20, 2013 /PRNewswire-USNewswire/ -- The outlook for commercial real estate markets among industry leaders is modestly optimistic as economic fundamentals show slow yet steady improvement. At the same time, public policy uncertainties in Washington and concerns over a potential rise in interest rates cloud the future, according to The Real Estate's Roundtable's Q2 2013 Sentiment Survey.
"Commercial real estate executives are seeing increased interest in transactions outside healthy core markets, but that sliver of good news is mired in anxiety – centered on whether the development of pro-growth policies could fall victim to political gridlock," Roundtable President and CEO Jeffrey DeBoer said.
The survey's "Overall Index" now stands at 69 – unchanged from the previous quarter and one point lower than Q2 2012. The overall index score is based on the average of two indices – the Current Conditions Index (71 for Q2 – up one point since Q1) and the Future Conditions Index (67 for Q2 – unchanged since Q1). Figures above 50 indicate a positive market trajectory. This quarter's Index indicates that senior commercial real estate executives continue to see favorable trends in both values and capital availability in major gateway markets, but remain anxious about how a potential rise in interest rates and political uncertainty could worsen market conditions.
"With the national economy moving forward at a glacial pace, uncertainty in the business world continues to dominate. That is directly reflected in our Q2 Sentiment Index, which remains flat, reflecting an uneven CRE recovery during a time of stagnant unemployment and artificially low interest rates," said DeBoer. "The health of the broader economy, which directly impacts commercial real estate, will be greatly influenced by fiscal policy decisions from Washington. The Roundtable and our national real estate trade group partners continue working with members of Congress and the Administration on common-sense policies that will create jobs and help inject more investment in CRE assets outside "gateway" markets."
Although market sentiment remains positive, many survey respondents anticipate general conditions could dip by next year. The survey shows a slight uptick in respondents who believe real estate market conditions in Q2 are "somewhat better" or "much better" than one year ago – 75 percent for this quarter versus 74 percent who responded the same way in Q1. Yet 62 percent said market conditions one year from now will be "somewhat better" or "much better" than today – a drop from 68 percent who said the same in Q1. As one survey participant stated, "There is a significant possibility that conditions a year from now could be meaningfully worse, particularly if interest rates start rising without real growth in the economy. This would be a dreadful scenario for real estate as rising financing costs would not be offset by occupancy and Net Operating Income gains."
Survey participants also see a significant improvement in asset values this quarter compared to one year ago, and a majority believe values will increase further next year. Eight-two percent of respondents say asset values in Q2 are "somewhat better" or "much better" than one year ago, versus 74 percent who answered the same way in Q1. However, respondents caution that asset value increases have been driven primarily by inexpensive capital. One industry leader noted, "In terms of overall real estate asset valuations, it is starting to feel a bit bubbly out there. The big question is what happens when banks start pulling back on their expansionary money policy."
The capital markets are also seen as healthy, with debt and equity seen as readily accessible. Yet many survey respondents expressed the need for more buying opportunities to balance supply and demand in this environment. Eight-eight percent of respondents believe current conditions for both debt and equity are better than those of a year ago, compared to 77 percent who answered the same way in Q1. A majority expects financing conditions will remain the same next year. One survey participant commented that "The abundance of equity capital has steered investors toward secondary markets and assets—they are looking for yield wherever they can get it."
About The Real Estate Roundtable Sentiment Index:
The Roundtable's Sentiment Index is the industry's most comprehensive measure of leading real estate executives' confidence in financial and real estate markets. The survey, conducted by FPL Advisory Group, captures the perspectives of senior real estate executives, including CEOs, presidents, board members, and other executives from a broad set of industry sectors including owners and asset managers, financial services firms and operators. A PDF of the entire survey report is available online at www.rer.org.
About The Real Estate Roundtable:
The Real Estate Roundtable brings together leaders of the nation's publicly-held and privately owned real estate ownership, development, lending and management firms with the leaders of national real estate trade associations to jointly address key national policy issues relating to real estate and the overall economy. Collectively, Roundtable members' portfolios contain over 5 billion square feet of office, retail and industrial properties; over 1.5 million apartment units; and in excess of 1.3 million hotel rooms. Participating trade associations represent more than 1.5 million people involved in virtually every aspect of the real estate business.
SOURCE Real Estate Roundtable
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