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Survey shows commercial real estate distress far from over

Nov 02, 2009

With high unemployment pushing up vacancies, no credit capacity and property values plummeting, commercial real estate markets remain extremely stressed with little prospect for significant near-term improvement, according to The Real Estate Roundtable’s latest quarterly survey of senior commercial real estate executives. All three indices tracked by the "Sentiment Survey" have risen considerably since the near-collapse of financial markets last fall—a reflection of respondents’ collective sense of relief at having survived the worst of the turmoil, and the extreme uncertainty and paralysis of last year giving way to a greater sense of acceptance of market realities. However, the latest numbers — particularly the "Current Conditions" reading of 56 — remain well below the ideal of 100. An overall index of 100 means all survey respondents have answered that conditions today are "much better" than they were a year ago, and will be "much better" 12 months from now. "The problems now are more clearly defined and there’s a grim sense of reality setting in, but that’s a long way from saying markets are stabilizing or that conditions are on the mend" said Roundtable President and CEO Jeffrey DeBoer. "With job losses mounting, consumer confidence in the doldrums, and a relapse of the recession still possible, additional policy action is needed to restore credit availability — the lubricant of the economy and job creation — and to address the equity shortage resulting from falling commercial property values," DeBoer continued. An overwhelming majority of the 100-plus respondents in the Q4 survey said property values are down today versus. a year ago, although the percentage declined to 77 percent from 93 percent in the previous quarter. But respondents were far from optimistic about future valuations, with 71 percent saying they expect values to remain "about the same" or to erode even further in the next 12 months. "So-called 'zombie buildings' and empty storefronts on Main Street will only mean bigger budget shortfalls for local governments, more layoffs for construction, hotel and retail workers, and further devaluation of investment portfolios held by individual and institutional investors," DeBoer added. "If there is any good news to report, it’s that the trillion-dollar refinancing crisis in commercial real estate now has the attention of policymakers at the highest levels—including President Obama." Fox Business News reported Oct. 16 that the president had been briefed recently by his top economic advisors about rising "maturity" and "performance" defaults on commercial mortgages and what this might mean for the U.S. banking system. Capital market conditions remain extremely fragile, the survey shows, but there is now a greater mix of perspectives on the markets' trajectory. On the debt side, 28 percent of those polled said credit availability is worse today than a year ago, compared to 71 percent who said so in the previous quarter. The percentage who characterized equity availability as worse today than one year ago also dropped significantly—from 55 percent in the 3rd quarter to 17 percent in the latest survey. As with the Fed's latest "Beige Book" report last week, DeBoer cautioned, any signs of "improvement" or of a leveling off in the rates of decline should be looked at in the context of where things were 12 months ago. Not surprisingly, given the depth of dysfunction in commercial real estate debt markets, almost all participants in the current survey (95 percent) expect debt market conditions to be at least the same or better 12 months from now. Although U.S. policymakers have adopted or implemented several policy recommendations offered by The Roundtable in its "Five-Point Liquidity Plan" this past year, additional steps are needed to reconnect loan originators and secondary markets; bring new equity into commercial real estate (primarily, through reform of the Foreign Investment in Real Estate Property Tax Act [FIRPTA]); and to improve the Term Asset-Backed Lending Facility’s (TALF) ability to foster new issuance of commercial mortgage-backed securities (CMBS). The quarterly Sentiment Survey seeks to capture feedback from a broad range of real estate industry segments, asset classes, ownership vehicles and capital structures, including owners and asset managers, financial services firms and operators. It is administered for The Roundtable by FPL Advisory Group of Chicago. Click here for a full copy of the Sentiment Survey report. For more information, visit
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