Congressional Real Estate Caucus Briefed: State of Real Estate Industry

NAIOP coordinated a "State of the Industry" luncheon and briefing held in June on Capitol Hill on behalf of National Real Estate Organizations (NREO). The event brought together NREO's 18 associations, industry experts and congressional staffs and Representatives to focus on the effect of today's economic climate on the industry and the key drivers and demand trends that are expected to influence market activities.

NAIOP's President Thomas J. Bisacquino opened the briefing by discussing real estates' critical role in the economy. He highlighted that:

• Real estate generates nearly one-third - or $2.9 trillion - of the U.S. GDP and creates jobs for more than nine million Americans.
• Real estate is the source for nearly 70 percent of local government tax revenues, which pay for schools, roads, public safety and other essential services.
• Total U.S. income-producing real estate investment (equity and debt) is valued at $4.6 trillion.
• Pension funds and real estate investment trusts are the largest institutional sources of equity real estate investment, with holdings valued at approximately $320 billion.

"The role of real estate plays a special role in our nation's economy. Not only generating wealth, but a sense of security," said Congressman Richard Neal (D-Mass.) in his opening comments. Congressman Neal was joined by Congressman Mike Turner (R-Ohio), both serving as leaders of the 2009 Congressional Real Estate Caucus. The Caucus is a bipartisan congressional member organization that provides an education forum for members to discuss federal policy and its impact on real estate.

"Real estate really tells the alphabet soup story of the investment and structure of what's in our communities, and today you bring us the issues that tell us how we can help you be more successful," said Turner. "In a lot of pieces of legislation, there are unintended consequences. We need the practitioners - the people who are in the industry and the people making a difference - to take a look and tell us how we can have an unintended negative effect." State of the Industry

NAIOP President Thomas J. Bisacquino and Congressman Michael Turner (R-Ohio) before the State of the Industry briefing on Capitol Hill, hosted by NAIOP and members of various National Real Estate Organizations.

Presenting to the 100 attendees were industry experts Alan Pontius, managing director of the National Office and Industrial Properties Group, Marcus & Millichap, and Lawrence Yun, chief economist with the National Association of Realtors.

Pontius focused on the office, industrial and retail markets, noting that the issue of debt capital is causing the greatest concern within the commercial segment of the industry. "You hear phrases like, 'the markets are frozen,' and this is largely attributable to the lack of new debt financing in the marketplace today," said Pontius. "The commercial mortgage backed securities (CMBS) market is essentially closed - it's no source of capital whatsoever," he noted. "Consequently, to get a transaction done today, what is required for the lion's share of transactions is assumed debt.

More than 50 percent of financing today is either assumed debt or the seller providing debt." With regard to the office segment of the market, Pontius said that what was hoped to be a real long-term stabilizing point in the office market was that the construction was not out of control. He noted that while the amount of new construction through 2007 did not add any space to the extent that had been added in previous recoveries, demand has fallen off so rapidly that there is now an oversupply problem. "With vacancy rates rising, we'll see a drop in rental rates. The negotiating power goes to the tenant," said Pontius. The industrial markets are tied more closely to the consumer than any other product. He noted that consumer demand is way down, and the demand for industrial space is a direct link to consumer demand.

In the retail segment, Pontius said that the significant amount of new construction is expected to cause a problem, as vacancy rates are raising. Cap rates are on the rise, and demand for a higher yield going into the property is higher today, because the risk levels are higher. "Retail values are being hit, and the average pricing on a cost-per-square-foot basis is coming down," said Pontius.

Yun focused on the residential markets, noting that 68 percent of Americans are homeowners and the declining value in homes results in the overall declining wealth of Americans.

"We are in the fourth year of a residential market recession, and hopefully this is the last year. We are beginning to see some early signs of recovery," said Yun. "Economists say that we can't have a sustainable economic recovery without the housing market returning. When home prices continue to decline, they ruin bank balance sheets, affecting the value of the mark-to-market accounting and lowering the value of the collateral."

Home sales today are comparable to 1998 (2005 was the peak), and although there are 30 million more people in the country than in 1998, Yun noted that home sale activity remains the same. The level of home inventory has fallen to 2000-2001 levels, as builders have significantly cut back on production.

The briefing is the most recent, high-profile effort by NAIOP and its NREO allies to educate members of Congress on the continuing problems and opportunities within the real estate industry, and to maintain the focus of lawmakers on pursuing policies designed to help address the concerns of the development community.

Congressman Turner summarized the importance of the real estate industry, saying that, "The one thing that we know is that for business to do business, it has to have a place to do business. The strength of the real estate industry is the ability to attract capital for the purposes of undertaking development that changes the face of our neighborhoods and communities, and more importantly, helps drive the economy of our country."