Commercial Real Estate Prices

THE ECONOMY & COMMERCIAL REAL ESTATE

Posted on Saturday, January 15, 2011

Fed’s Beige Book: Continued Pockets of Economic Distress, but Definite Signs of Recovery; Commercial Real Estate on the Mend, But Not Out of Danger Yet
The Federal Reserve’s Jan. 12 “Beige Book” — intended to help guide the Federal Open Market Committee (FOMC) when it next discusses monetary policy, on Jan. 25-26 — shows an economy very slowly recovering from recession, with some continued pockets of distress, but also definite signs of progress (The Washington Post, Jan. 12). The report, which is based on anecdotal information from businesses around the country, offers further confirmation that the manufacturing sector “continued to recover”; that retail and service industries (outside of finance) appear relatively strong; and that labor market conditions “appear to be firming.”
The housing sector, however, remains a significant drag on the economy, as “activity in residential real estate and new home construction remained slow across all Districts,” according to the Fed report.
Separate reports show a similarly divided outlook for commercial real estate markets – i.e. although conditions are improving, the sector is not yet out of danger. “The market is on the mend, but not out of danger by a long shot,” MIT Center for Real Estate professor David Geltner stated in a Jan. 3 Fortune report. Although operating fundamentals (vacancy rates, rents, and sales) are markedly improving in so-called “gateway cities,” investor interest remains dampened in secondary markets. Along these lines, Geltner said the bulk of the commercial real estate market — the “soft middle” — has barely budged.
Another potential risk: interest rates. Although public REITs are delivering strong investor returns, transaction volume is increasing, and interest in CMBS is picking up, interest rates are expected to become more volatile as waves of bubble-era debt come due. According to Fortune, “Increasing and more volatile interest rates could generate other troubles for the market, making buyers skittish and leaving owners with problematic refinancing costs.”
And, while last week’s reports of a slight drop in the unemployment rate (from 9.8 percent 9.4 percent) were certainly welcome news to the commercial real estate sector — hit hard by reduced operating income, property values and equity — an unemployment rate above 9% remains too high, and the hard-hit construction sector continues to lose jobs as federal stimulus dollars dry up.
The uptick in business demand for space is encouraging; however, “the employment situation does not inspire robust projections in 2011,” Cassidy Turley’s chief economist, Kevin Thorpe, told The Washington Business Journal recently (Jan. 10). He added, “The U.S. office sector is still a minimum of 18 months away from a balanced market.”
Similarly, says Roundtable President and CEO Jeff DeBoer in advance of the organization’s 2011 State of the Industry Meeting on Jan. 26, “There is much reason for optimism as the darkest days of the Great Recession appear behind us. But our outlook must be tempered and cautious.”
THE REAL ESTATE ROUND TABLE


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