By Matt Valley
WASHINGTON, D.C. — U.S. commercial real estate markets continue their gradual recovery from recession in the form of improving fundamentals, transaction volume and capital flows, and will likely remain on a modestly upward trajectory during the coming year. That’s the takeaway from The Real Estate Roundtable’s latest sentiment index.
Yet, the survey also reveals a lingering wariness among senior industry executives about prospects for a sustainable economic recovery. Despite a brightening economic outlook and recent bipartisan cooperation on the federal budget and debt ceiling, various policy risks continue to weigh on real estate markets.
These risks include the scheduled sunset of the Terrorism Risk Insurance Act (TRIA) on Dec. 31, which could spark a job-killing commercial real estate credit crunch; tax reforms that could cause major dislocation in real estate markets; and the economic conditions surrounding future interest rate hikes, which could put renewed pressure on valuations, complicate loan refinancing and impede debt servicing.
Chicago-based FPL Advisory Group conducted the first-quarter sentiment survey on behalf of The Real Estate Roundtable. The survey measures the views of CEOs, presidents and other top executives regarding current conditions and their future outlook on three topics: overall real estate conditions, access to capital markets and real estate asset pricing.
The sentiment index is measured on a scale of 1 to 100. To register an index of 100, all respondents would have to answer that they believe conditions are “much better” than one year and ago and will be “much better” one year from now.
To view a larger version of the Sentiment Index graph, click here.
Among the key findings of the latest sentiment survey:
• The Q1 Index rose two points to 69, with sentiment reflective of a slowly and steadily improving economy, but the dysfunction in Washington is a primary concern.
• Confidence is supported by improving fundamentals, but offset by expectations of rising interest rates. At the same time, transaction volume and capital flows have picked up, particularly in secondary markets.
• Asset values are expected to remain mostly flat over the coming year, with a potential for modest appreciation coming from improving property-level cash flows rather than cap rate compression.
• Both debt and equity capital are perceived as widely available, as foreign capital continues to move into the United States. Some survey respondents fear a resurgence of frothy behavior.
“The slight uptick in our latest sentiment index shows our industry on a generally positive path — in keeping with broader macroeconomic trends — yet still not fully recovered and still subject to policy-related risks,” says Real Estate Roundtable Chairman Robert Taubman, president and CEO of Bloomfield Hills, Mich.-based Taubman Centers Inc., a publicly traded shopping center REIT (NYSE: TCO).
“U.S. policymakers must work to create a more attractive climate for job creation and investment, as these are critical to real estate’s health. And as real estate goes, so goes the economy,” adds Taubman, whose firm owns an international portfolio of regional and super-regional malls.
Jeffrey DeBoer, president and CEO of the Real Estate Roundtable, says the commercial real estate industry has stabilized and is poised to lead the economy forward in the areas of job growth, GDP, tax revenue, and retiree investments held by U.S. pension funds.
“But for these contributions to materialize,” DeBoer emphasizes, “Washington needs to foster appropriate risk-taking and entrepreneurial activity, provide more clarity on key policies, protect U.S. economic and homeland security, and enact positive, pro-growth reforms in the tax, immigration and energy policy spheres.”
For the full survey report and the Real Estate Roundtable’s 2014 policy agenda (Together: Real Estate, Jobs, Economic Growth), go to www.rer.org.
Based in Washington, D.C., 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, the portfolios of Real Estate Roundtable members contain more than 12 billion square feet of office, retail and industrial properties valued at more than $1 trillion; over 1.5 million apartment units; and over 2.5 million hotel rooms. Participating trade associations represent more than 1.5 million people involved in virtually every aspect of the real estate business.