Commercial Real Estate Woes Continue

Amid possible signs of stabilization within the commercial real estate market, many real estate executives say the road to recovery won't be easy.

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Concerns regarding the future of the commercial real estate market were reported by many industry insiders in the 1st quarter Sentiment Survey completed by the ""Real Estate Roundtable"":http://www.rer.org/, which brings together leaders in the real estate industry to address key national policy issues relating to real estate and the overall economy. The latest Sentiment Index, derived from the survey, was at 73, up from 63 in the previous quarter. This, the Roundtable said, shows an industry just beginning the process of pulling itself out from the depths of the deepest real estate downturn seen in a generation.

The Overall Sentiment Index is calculated based on the averages of Future and Current Indexes, all which are measure on a scale of one to 100. To reach an overall index of 100, all survey respondents would have to answer that conditions are ""much better"" today compared to one year ago (Current Conditions Index), and will also be ""much better"" 12 months from now (Future Conditions Index). The Current Conditions Index was 69, marking a 13 point increase from the previous quarter, and the Future Conditions Index came in at 77, an increase of seven points during the same period.

Although the Sentiment Index indicated that confidence in market conditions may be on the mend, industry leaders remain guarded in their improved outlook. The most common concern among the 110 plus real estate executives who were surveyed was the impact of declining fundamentals and deterioration in net operating income (NOI).

""Our industry urgently needs public policies that will drive job growth in the economy,"" said Jeffrey DeBoer, president and CEO of the Roundtable. ""We need policies that will facilitate equity investment in real estate, and we need policies that will restart a secondary market-to help banks clear their balance sheets of toxic assets while encouraging greater lending to credit worthy borrowers, both large and small.""

DeBoer said the sense of overall gloom that prevailed one year ago has eased, and credit markets have thawed somewhat. However, he said there is a long road to recovery ahead and policy uncertainty only makes the road more difficult to travel.

""There are 20 million or more people who are underemployed or unemployed. Businesses are being very cautious. The federal government is considering raising taxes,"" one CEO explained. ""All of this is causing uneasiness.""

Another prime concern was that if interest rates are raised now to counter inflationary pressures, it would undermine the conditions needed for economic recovery. Many respondents said they expect lenders to continue loan extensions to avoid foreclosures, particularly for high-quality assets wallowing in a distressed market. However, with hundreds of billions of dollars of commercial real estate debt maturing annually over the next several years and limited availability on the horizon, many respondents believe the deleveraging process necessary for an economic rebound has been delayed.

""The volume of commercial real estate transactions is anemic,"" Deboer noted. ""Transaction volume is down more than 90 percent compared with 2007.""

As value determination is made more difficult and lenders are more reluctant to extend credit, Deboer said the scarcity of transactions feeds on itself. He believes policy actions that facilitate equity infusions, particularly from global capital sources, would help spur transaction volume and assist in deleveraging maturing debt.

Although there are concerns looming, survey participants did report a positive outlook on capital markets. This is perhaps the biggest reason for the positive change in the Sentiment Index this quarter, as approximately two-thirds of respondents said capital-for both debt and equity-is more accessible now compared to the financial crisis one year ago. In addition, 83 percent predicted an increased availability of debt capital in on year, and 75 percent said there would be an increase in available equity in one year.

Some respondents also said asset values may be close to bottoming out. While 45 percent expect real estate asset values to increase in the next year, 35 percent expect values to remain flat, and only 19 percent predict further declines. ""The free-fall in pricing has stopped,"" said one interviewee. ""Values are going to stay along the bottom through 2010.""

""Just as there is no single cause of the financial crisis, there is no single solution-no 'silver bullet'-to address the mammoth refinancing challenges in commercial real estate,"" DeBoer said.