DLA Piper 2013 State of the Market Survey Predicts 'Bullish' 2013

Real estate executives cite the strengthening economy, low-cost financing afforded by artificially low interest rates and easier access to capital as the top reasons they are feeling good about the year ahead.

The survey, measuring the attitudes and perspectives of 189 top executives within the commercial real estate industry, reveals that 85 percent of respondents describe their 12-month outlook for the U.S. commercial real estate industry as “bullish,” reversing a far more pessimistic outlook that prevailed in 2011 when only 30 percent of commercial real estate executives described their outlook as bullish. This is also a tremendous leap forward from 2008, when just 10 percent of respondents had a positive mindset for the sector.

While most executives don’t expect to see a sustained, broad economic recovery lift real estate fundamentals this year, most expect real estate capitalization rates to remain steady or even go down some, keeping commercial property values aloft and perhaps even boosting them to new highs.

“The market is being driven by low-cost financing and an abundance of capital seeking investments, and there is little concern that interest rates will rise in the near term,” said Jay Epstien, chair of DLA Piper's U.S. Real Estate practice and co-chair of the firm’s Global Real Estate practice. “Although a spike in interest rates would reverberate throughout the market, the main risks come from slow job growth and political gridlock in Washington — neither of which are likely to be resolved anytime soon.”

“On the other hand, one of the industry’s main fears — an increase in the tax on carried interest — is seen as extremely unlikely this year, perhaps stemming from the very same political gridlock that is preventing politicians from getting the country’s fiscal house in order,” adds Epstien.

Other highlights of DLA Piper’s 2013 survey include:

• Executives believe the Fed when it says interest rates will remain low for the upcoming year. Half believe interest rates will rise slightly, and the other 49 percent believe rates won’t change at all.

• Sixty eight percent expect cap rates to remain steady. But 19 percent think cap rates are headed down, a sign they believe real estate prices will go up.

• Healthcare, although a specialized segment in the overall real estate market, is rated as the most attractive opportunity for investors in the year ahead, followed by multifamily and industrial.

• Among non-gateway cities, Houston, Dallas and Miami are expected to have the best-performing commercial real estate markets in the coming year.

• Political gridlock in Washington, D.C., is grating on executives and is ranked as the No. 1 thing that needs to change for the U.S. to get its fiscal house in order.

• The market remains awash in capital. Executives expect private equity (29 percent), foreign investors (26 percent) and pension funds (23 percent) to be the most active players.

In addition to the raw data captured, survey respondents shared some interesting perspectives when asked to reveal their thoughts on the single largest issue and/or challenge facing the U.S. commercial real estate industry, beyond weak job growth.

One respondent summed it up in two words: “Political gridlock.” Another respondent alluded to the potential for a new real estate bubble: “Readily available, low-cost debt; resulting in loosening underwriting standards.”

The survey coincides with DLA Piper’s 2013 Global Real Estate Summit held in Chicago on April 30 and attended by many of the executives included in the survey.

DLA Piper is a global law firm with 4,200 lawyers located in more than 30 countries throughout the Americas, Asia Pacific, Europe and the Middle East, positioning it to help companies with their legal needs anywhere in the world. In certain jurisdictions, this information may be considered attorney advertising.

For access to the complete State of the Market Survey report visit www.dlapiperresummit.com.