Improving Fundamentals Aside, Pessimism Spikes at DLA Piper Real Estate Conference Over Sluggish Economy, Political Gridlock
The number of real estate executives surveyed by DLA Piper who described themselves as “bearish” in their outlook over the next 12 months spiked at this year’s annual real estate confab, with more than 70% of those surveyed taking a dour view of near term prospects. Many said that global financial volatility, stagnant job growth, federal government gridlock and an economic recovery that Federal Reserve Chairman Ben Bernanke this week told Congress is “close to faltering” has taken a toll on their confidence levels.
Much of the blame for the current market turmoil was directed at Washington, particularly the president, as voiced in a lively exchange Tuesday between real estate icons Sam Zell and Mortimer Zuckerman during the keynote presentation at DLA Piper’s 10th Global Real Estate Summit in Chicago.
One major issue, not only in this country and around the world, is the huge global overhang of debt, Zuckerman, chairman of Boston Properties, Inc. (NYSE: BXP), said at the summit.
“That debt is going to take a long time to unravel, particularly for the American consumer, whose spending drives 70% of the economy,” Zuckerman said, asserting that 25 million working-age Americans are unemployed or underemployed and not a single full-time job has been created on a net-net basis since the current administration took office in January 2009. “They have lost complete confidence in the economy as well as in the leadership of this country. The collapse of confidence in this Administration and in the economy is going to affect everything.”
Zell, chairman of Equity Group Investments, leveled a critique of the Obama Administration using particularly salty language, comparing the president unfavorably to former presidents Reagan, Clinton and even Carter.
“The president sets the agenda, and the agenda is out of line with America,” said Zell, whose $39 billion sale of the assets of the former Equity Office Properties Trust to Blackstone Group topped the real estate boom market. “In the end, what makes America work is the risk takers, whether they be in real estate or social engineering. America succeeded better than anyone else in the world for one simple reason — we created a culture of risk, and we encourage risk. We’ve now created an environment that’s so difficult and so uncertain that everybody’s appetite for risk decreases accordingly.”
“They did inherit a tough hand, but they played it so badly, and they did it at a moment when the country was hungry for leadership,” Zuckerman added. “We’re in a very difficult position because we, in my judgment, have not hit bottom, and nobody knows where the bottom is. It’s unprecedented and therefore, unpredictable.”
Jay Epstien, a partner in DLA Piper’s U.S. and global real estate practices, said that the 70% of executives who described themselves as bearish in the firm’s State of the Market survey — up from 60% during the last survey released in May 2010 — probably reflects the financial market rollercoaster ride of the last six to eight weeks. The latest edition of the widely followed survey of sentiment conducted every 18 months included responses of 280 professionals, mostly senior executives representing a cross section of the commercial property industry in multifamily, retail, office and industrial sectors, including lenders, investors, tenants and brokers.
Uncertainty has “moved the money a few steps back toward the sidelines as investors see how things play out over the next quarter,” Epstien told CoStar.
“Little confidence in the markets makes people more conservative and cools their enthusiasm for doing deals,” he said. “As someone said in the survey, ‘when there’s no clarity, it’s pretty difficult to underwrite the future.’”
Despite the strident pessimism, only a slim majority of executives believed that capital markets turmoil will significantly derail transaction in the second half of 2011. In another surprise finding, private equity topped the list of the most active players expected over the next year at 35%. REITs, which led the list of active players in the 2010 survey, fell to 16%, behind foreign investors (25%) and pension funds (20%).
The FTSE NAREIT All REIT Total Return Index fell 15% in the third quarter, and unusually, underperformed the broader stock market, according to NAREIT.
“Turbulence in the capital markets, and the corresponding uncertainty regarding pricing and value in commercial real estate, would likely slow transaction activity,” said Mark Fitzgerald, debt analyst with Property and Portfolio Research (PPR) CoStar Group’s analytics and forecasting division. Fitzgerald added that REITs can probably be expected to pull back in the near-term as their stock prices, which have dropped during the recent market volatility, tend to be a leading indicator of their asset acquisition activity.
Ninety percent respondents expect the domestic market for commercial mortgage-backed securities (CMBS) to continue to cool during the remainder of 2011, predicting volumes of well below $40 billion by year end. Despite potentially more attractive terms available via CMBS, 55% reported a preference for financing from conventional portfolio lenders.
“The CMBS markets have certainly cooled — there are some deals that were lined up before the recent turbulence that will still come out later this year, but there is very little in terms of new lending,” Fitzgerald noted. “Warehousing risk is high when the markets are volatile, as shown by the Goldman/Citi deal.”
In other survey results, respondents ranked the fate of Greece as their main concern as the sovereign debt crisis continues to plague Europe, followed closely by Italy and Spain.
The three top-ranked international regions for investment opportunity remained Brazil, China and India, remaining unchanged for the first time in seven years.