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Real Estate Roundtable Sentiment Index: Commercial Markets Slowly on the Rise

Feb 01, 2011

The 1st Quarter 2011 Real Estate Roundtable Sentiment Index shows the most positive results since the survey of senior commercial real estate executives began in 2008. At the close of their recent 2011 State of the Industry Meeting, Roundtable President and Chief Executive Officer Jeffrey DeBoer said, "The commercial real estate marketplace is improving, particularly in top-end urban cities. But smaller, more mainstream markets continue to face big challenges, and industry leaders in all parts of the country still have serious concerns about job growth." "It's all about jobs. Some industry sectors are on the mend, but until private sector job creation picks up, we are certainly not out of the economic danger zone," said Roundtable Chairman Daniel M. Neidich of Dune Real Estate Partners. "Commercial real estate markets tend to recover from the top down, when higher quality markets attract new capital and eventually other markets are affected. But legitimate headwinds remain, such as an unacceptable unemployment level, a huge pipeline of maturing commercial mortgages and large fiscal issues at the state and local levels of government. There may be an up-tick in tone expressed in our 1Q 2011 Sentiment Index, but it is tempered by the ongoing economic risk of unemployment." "Although U.S. policymakers have taken extraordinary measures in recent years to calm financial markets, prevent the collapse of major institutions and encourage credit to flow again throughout the economy, new tax policies and other federal actions are needed before we return to a more typical marketplace," said DeBoer. "Since the financial crisis hit, commercial real estate values have dropped, yet high debt remains. Congress needs to help the industry bridge this massive 'equity gap' and make the nation more competitive on a global level. Until that is achieved, industry optimism will remain cautious due to economic weaknesses that remain far from resolved." The Roundtable's 1Q 2011 Overall Sentiment score of 77—up three points since 4Q 2010—indicates that survey respondents see the commercial real estate industry on a more favorable slope and expect slightly improved market conditions in the coming year. The overall score of the Sentiment Index is based on the average of both current and future indices, which both registered 77. The 1Q survey results and interviews with executives combine to highlight the belief that CRE market conditions have shifted—and in light of the damaging fiscal events of past years, many are surprised to find the market where it is today. Equity is seen as broadly available, debt is rebuilding from a very low base and transactions have begun to pick up. Values are also expected to trend modestly upward, but many expect relatively restrained price movement until fundamentals return and Net Operating Incomes improve—and that is not expected anytime soon. Yet there is a strong hope among the survey respondents this quarter that 2011 will represent a return to a more typical real estate marketplace in which buyers and sellers are actively competing for deals on reasonable valuations, with equity and debt providers each playing more normalized roles. One CEO offered the following market analogy: "It's like a flywheel. You have to get the flywheel moving, get it to pick up momentum. Real estate has been slowly picking up speed, and I think this year we'll have momentum. Maybe not as much as we like, but momentum nonetheless." Survey participants reported that in the capital markets, equity capital is now widely available whereas debt is somewhat less available, but significantly better than one year ago. One of the key changes that some interviewees expect in the debt space is that competition between debt providers—which has been largely nonexistent in recent years—will resume and eventually drive lenders to finance properties that may be more challenging to finance today. Among the survey respondents, there is even some optimism that the CMBS market will start the long process of rebuilding this year. One interviewee said, "I see CMBS coming back this year. Not to its peak, but I expect $45-50 billion in 2011. It will be a little like CMBS was in 2005." More than 100 executives from the commercial real estate sector—encompassing office buildings, shopping malls, warehouses, hotels, and apartment buildings—responded to the latest Sentiment Survey. Click here to view a full copy of the 1Q 2011 Sentiment Survey Index. For more information, visit
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