CRE Finance Update, Part III: Survey Says… We’ve Reached Rock Bottom

After many months of increasingly disturbing statistics and equally dire predictions for the commercial real estate (CRE) market, we may have reached a crucial turning point: Although concerns regarding refinances and distressed debt persist, industry executives have noticeably shifted their overall outlook into positive territory. If the worst has not already passed, it is likely to arrive soon enough to place more promising times within reassuringly close sight.

In fact, a full 60% of surveyed CRE executives believe the markets have already reached bottom or will reach bottom during the remainder of this year, according to DLA Piper's 2010 State of the Market Survey, which was released this week.

‘Faced with billions of dollars in commercial real estate debt coming due, the industry refuses to panic, sensing that the bottom of the cycle is upon us,’ DLA Piper states in its report. ‘Responding to this bottoming-out process, the outlook for the U.S. commercial real estate industry remains largely bearish, but it is noticeably improving.’

No one is breaking out the party hats just yet; this relative optimism remains tightly constrained by the many still-unavoidable negative influences in the market.

Consequently, 60% of respondents still described themselves as ‘bearish’ on CRE – a majority, but a less overwhelming majority than the record 90% of respondents who reported being bearish during DLA Piper's previous survey. The earlier survey took place during the infamous tumultuous times of September 2008.

Between September 2008 and the present time, the federal government's various market recovery programs – such as the Troubled Asset Relief Program and the Term Asset-Backed Securities Loan Facility – appear to have fulfilled their role in helping boost industry optimism, even if their actual effect specifically on the CRE market remains debatable. Approximately two-thirds of survey respondents believe the federal government has done ‘enough’ to stabilize the market, according to DLA Piper's survey.

Nearly 70% of executives said they do not expect additional legislation focused on helping CRE to be forthcoming. Interestingly, these industry professionals seem perfectly content with this expectation, as their answers to ‘What do you think regulators should do to further stimulate the recovery of the U.S. commercial real estate market?’ in the survey's free-response section make abundantly clear.

Responses of ‘Nothing,’ ‘Get out of the way,’ ‘Stop interfering,’ ‘Let the cards fall where they may,’ and ‘Let some big banks fail,’ suggest that although earlier government intervention may have been appreciated, further action is interpreted as simply unwelcome meddling.

This free-market sentiment appears well aligned with respondents' observations that the bottoming-out process is completed or imminent. After all, if we're already reaching the market's low naturally, wouldn't a gradual climb back to normalcy – or some version of a new normalcy – represent the likely next phase, regardless of the government's actions?

On a more negative note, among survey respondents who described themselves as ‘bearish,’ nearly half cited sluggish economic growth or job growth as the primary reason for their lack of confidence in the CRE market.

Continued fallout from the credit crisis and an inability to bridge the bid-ask gap on pricing also troubled many respondents, and 4.32% blamed their bearishness on the Obama administration and Democratic policies. (Interestingly, 1.63% of bullish respondents credited Obama's policies as the primary reason for their bullishness.)
With the more than $150 million in commercial mortgage-backed securities (CMBS) loans expected to come due in the next two years, 60% of survey-takers do not believe the CMBS market will return in time to help with refinancing this massive sum, DLA Piper found. As the company points out, the percentage of CMBS believers (40%) matches the percentage of bullish survey-takers, suggesting a possibly telling link.

Loan workouts and extensions are expected to be the most popular tools of the trade for borrowers and lenders caught in refinance troubles, with 40% and 27% of industry executives, respectively, citing these strategies as the most important.

Recapitalizing with new money and diluting the remaining equity stakes, selling the property in question and walking away may also be employed – albeit by smaller numbers of lenders/borrowers.

‘Despite several highly publicized examples of owners walking away from their properties and turning over the keys to lenders, respondents do not see a trend developing: Only four percent report that walking away will be the most prominent strategy,’ the report says.

Finally, in evaluating all of the survey's results, some geographic background on respondents may be useful. According to DLA Piper's breakdown of CRE executives who participated, nearly half (41.56%) hail from Chicago or the surrounding region. The rest of respondents were divided across the country, with no more than 11.69% from a particular region.


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