Email
Print
Bankers See Price Stabilization, but Impediments to Real Property Recovery Remain
Despite Improved Conditions, CRE Delinquencies and Losses Expected to Remain Elevated for Some Time
By Mark Heschmeyer
Weakness in real estate markets, both commercial and residential, continues to affect the overall growth of the economy. However, the rate of deterioration in market and credit conditions has leveled off, and there are some early signs of price stabilization.
Nonetheless, commercial real estate delinquencies and losses are expected to remain elevated for some time, according to Walter E. Mercer, executive vice president of commercial real estate at SunTrust, in a presentation he made in December hosted by the Federal Reserve Bank of Atlanta
The key to recovery in the CRE market is the recovery of the jobs lost during the recession, Mercer said. However, even that is a bit of Catch 22 situation, as he explained.
Between January 2008 (peak) and February 2010 (trough), the U.S. lost 8.8 million jobs, or 6.3% of all nonfarm jobs. Since February 2010, only 1.5 million jobs, or 17% of jobs lost, have been recovered. A full recovery of nonfarm jobs is not expected until 2013.
The job recovery will depend on industries other than the construction industry. Between April 2006 and January 2011, the U.S. construction industry lost 2.2 million jobs (from 7.7 to 5.5 million), representing 29% of all nonfarm jobs lost. The excess supply of real estate coupled with tepid demand for such space implies no significant creation of construction jobs until the commercial real estate sector recovers.
Regarding market fundamentals, Mercer said the CRE market continues to show signs of a tepid ongoing recovery, along with slight but promising signs for recovery in the economy as a whole.
Office: Monthly data suggests a slowdown in leasing activity that is largely reflective of the disruptions in the economy during the last two quarters, according to Mercer. However, rents have increased fairly consistently over the last four quarters, albeit at less than spectacular rates. It looks like the fledgling recovery of the office sector is proceeding at a slow pace, Mercer reported. Absorption and rent growth are positive, but not very robust. These results are all in line with slow economic growth and the anemic rate of job creation.
Retail: At this juncture, the key risk for the retail sector is depressed consumer sentiment and heightened fear of another recession, said Mercer. With demand anticipated to remain weak and more new space slated to come online in the fourth quarter, it is expected to see record or near-record vacancy rates for the remainder of 2011.
Multifamily: As the apartment sector posted positive net absorption in 2011, effective rent increases continued to outpace asking rent increases slightly, indicating that concession packages continue to erode. Unless sentiment and fear tip the economy back into a recession, Mercer expects the multifamily recovery will continue. However, there are growing concerns about over saturation as this is the only "hot product" right now.
Capital Markets: Financing should not prove to be a hindrance in real estate recovery since financial institutions are carefully moving back in to lending, Mercer said. However, the real estate market in many places is meaningfully over leveraged and requires new sources of funding to meet the demand of CRE loans that are set to mature in the coming years. The Fed's stance on maintaining a low interest rate environment continues to favor investment in commercial real estate.
