Despite broader economic uncertainties, this year has been a positive one for commercial real estate (CRE), and a budding sector recovery is under way, Deloitte LLP says in a recently released report titled ‘Commercial Real Estate Outlook: Top Five Issues in 2011.’
‘The uncertainty impacting the overall economy and other industries has had less of an effect on the real estate industry,’ says Bob O'Brien, vice chairman and real estate sector leader at Deloitte. ‘It's important to remember that commercial real estate was the first sector to be hit hard by the downturn, so it is further along in rebounding than other businesses."
Although CRE fundamentals have stabilized, low levels of consumer spending, reduced federal spending, slow employment growth and a weak housing market could delay further recovery, Deloitte warns, calling strategies that are based on expectations of a modest and gradual return to growth "key."
O'Brien goes on to caution that the high levels of debt maturity coming due over the next four years "may present short- and longer-term challenges for the remainder of this year and into 2012.’
Refinancing risk will remain high because of the elevated proportion of CRE loans slated to mature by 2015 that are held by regional and local banks facing liquidity challenges, the report finds.
Despite increased availability of debt and equity capital, issuance continues to favor high-quality, stable assets, Deloitte says. Until lenders again originate loans for "non trophy" assets and refinancing options expand to stabilize debt maturities, the prospects for a broad CRE market recovery will remain diminished, researchers find.
The report also projects that real estate investment trusts and distressed transactions will drive activity this year. Such transactions will require demand for non-trophy asset sales.
From a regulatory perspective, the Deloitte report explains that the CRE market is attempting to work through the uncertainty of how legislation such as the Dodd-Frank Act will be implemented. Other key regulatory and legislative topics include the Volker Rule, risk retention, lease accounting standards and covered bonds.
