Industry executives currently have a ‘modestly optimistic’ outlook on the U.S. commercial real estate market, as economic fundamentals show slow yet steady improvement, according to the latest Sentiment Index from The Real Estate Roundtable. However, public policy uncertainties and concerns over a potential rise in interest rates cast doubts on the market's future.
‘Commercial real estate executives are seeing increased interest in transactions outside healthy core markets, but that sliver of good news is mired in anxiety, centered on whether the development of pro-growth policies could fall victim to political gridlock,’ says Jeffrey DeBoer, president and CEO of the Real Estate Roundtable.
The company's survey for the second quarter of 2013 reveals an overall Sentiment Index of 69 – unchanged from the previous quarter and one point lower than in the second quarter of 2012. The overall index score is based on the average of two indices: the Current Conditions Index (which stands at 71, up one point from the previous quarter) and the Future Conditions Index (67, unchanged since the first quarter).
Figures above 50 indicate a positive market trajectory, the Real Estate Roundtable notes. This quarter's index indicates that senior commercial real estate executives continue to see favorable trends in both values and capital availability in major gateway markets, but remain nervous about how a potential rise in interest rates and political uncertainty could worsen market conditions.
‘With the national economy moving forward at a glacial pace, uncertainty in the business world continues to dominate,’ says DeBoer. ‘That is directly reflected in our Sentiment Index, which remains flat, reflecting an uneven commercial real estate recovery during a time of stagnant unemployment and artificially low interest rates.’
Although market sentiment remains positive, many survey respondents anticipate that general conditions could dip by next year. The survey shows a slight uptick in respondents who believe real estate market conditions in the second quarter are ‘somewhat better’ or ‘much better’ than one year ago: 75% for this quarter versus 74% in the first quarter.
However, 62% of respondents predicted that market conditions one year from now will be ‘somewhat better’ or ‘much better’ than today. This number dropped from 68% in the previous quarter.
‘There is a significant possibility that conditions a year from now could be meaningfully worse, particularly if interest rates start rising without real growth in the economy,’ one survey respondent explained. ‘This would be a dreadful scenario for real estate, as rising financing costs would not be offset by occupancy and net operating income gains.’
Survey participants also see a significant improvement in asset values this quarter compared to one year ago, and a majority believe values will increase further next year.Â Eight-two percent of respondents say asset values are now ‘somewhat better’ or ‘much better’ than one year ago. At the same time, respondents cautioned that asset value increases have been driven primarily by inexpensive capital.Â
The capital markets are also seen as healthy, with debt and equity viewed as readily accessible. Yet many survey respondents expressed the need for more buying opportunities to balance supply and demand in this environment. Eight-eight percent of respondents believe current conditions for both debt and equity are better than those of a year ago, compared to 77% who answered the same way in the first quarter.
Finally, a majority of respondents predicted that financing conditions will remain the same next year. ‘The abundance of equity capital has steered investors toward secondary markets and assets,’ one survey respondent stated. ‘They are looking for yield wherever they can get it.’