Search this blog:
Follow Avison Young:

Wednesday, May 18, 2011

Roundtable Feedback

By Earl Webb (Chicago)

 I was at an industry roundtable yesterday (I won't call it by name since I'm sure the host will produce their own version of the proceedings) and there were a few key learnings that I was able to glean. The participants included developers, pension funds and managers, private equity and financing sources and, of course, brokers.

 One learning was that almost to a person everyone was optimistic on the near and longer-term future of commercial real estate. Many assumed that the cost of money would remain low and that financing would continue to become more abundant. Also, core assets, with stable case flows, will remain the most desired investment class, especially in the biggest coastal cities. Everyone agreed that development, with the possible exception of multi-family, has been non-existent for at least three years now and with no new demand in sight. I was the only real cautious participant, as I still believe that there is a growing threat of near-term inflation which will cause an upward movement in rates (more on that below). Additionally, state and local governments are struggling with runaway operating deficits (when combined with pension fund under-funding it really gets ugly) which will serve to dampen the effect of any private-sector employment growth and potentially kill an economic recovery. Click for Merideth Whitney's latest comments on the municipal market mess.

 The threat of inflation is apparently front-of-mind for corporate CFOs as they are rushing to the debt window to refinance at today's low rates. Billions of dollars of debt has been raised in the first quarter of 2011 by major US companies as they hedge against the possibility of a Fed sell-down of securities bought during QE2. Today's Wall Street Journal details the rapid corporate refinancing taking place. The impact of a 200 to 300 basis point increase in mortgage rates in the commercial real estate markets would be profound, driving cap rates up by similar amounts and erasing some property net cash flows that are present largely due to low borrowing costs. However, I do think the Fed and Treasury policy-makers are astute and will be able to correct this situation in fairly short order, and, as such, should keep any market disruption to a minimum.

 There is a healthy sales and financing environment right now, albeit with minimum improvement in real estate market fundamentals (i.e. driven by low-cost money). Job growth is key to improved fundamentals and we've only begun to see those numbers improve (and again, watch what happens to the public sector employment numbers in the coming months). With a little luck and a lot of careful policy-making at the state and federal levels, we might actually be able to withstand a rise in rates and keep the flow of capital open to real estate. There are a lot of variables and virtually all of them must fall into the right place for success. If that happens, then my fellow participants in yesterday's roundtable might actually be right.

The postings on this site are those of the bloggers and do not necessarily represent the views or opinions of Avison Young.