“The markets are improving on the edges, worthy credit is becoming more accessible and industries are getting back on their feet,” said United States Congressman Richard Neal (D-Mass.) in his opening comments at a “State of the Industry” luncheon and briefing held in February on Capitol Hill.
Congressmen Neal was joined by fellow 2011 Congressional Real Estate Caucus co-chair Congressman Michael Turner (R-Ohio). 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.
Among both Representatives’ comments was the importance of steadying the residential markets and the climbing number of foreclosures. “The mortgage foreclosure crisis is continuing to erode values of our neighborhoods, rob wealth from our families and hold down all real estate because it affects the banks’ ability to lend, the issue of value and our overall economy,” said Turner.
State of the Industry
The event, organized by NAIOP and hosted by the National Real Estate Organizations (NREO), brought together 18 associations, industry experts and congressional staffs and Representatives to focus on the effect of today’s economic climate and what will continue to drive recovery.
Presenting to the 70 attendees were industry experts Robert M. White, Jr., CRE, FRICS, founder and president, Real Capital Analytics Inc., and Dr. David Crowe, chief economist and senior vice president, National Association of Home Builders. “If the residential market is where we house our people, than the commercial market is where we house our economy,” said White.
White said that there are two drivers in commercial real estate: space markets (rents and occupancy levels) and the capital markets (debt and equity capital). Although the space markets have been hit hard, it’s the capital markets that have been the most impacted during the financial crisis.
With regard to space markets, office and retail are now declining from their all-time high vacancy rates. Multi-family is a little steadier, as people aren’t buying homes and are renting instead. White said that overall, the demand for real estate is still very weak.
Congressman Michael Turner (R-Ohio)
With regard to the capital markets, 2007 saw $550 billion commercial sales – this dropped significantly to $55 billion in 2009. There’s great variation in capital by market, with capital availability the highest in Washington, D.C., San Francisco and New York City.
White said that the CMBS markets seizing in August 2007 and the financial crisis following in 2008 caused a tremendous amount of properties to not meet their debt service or pay off loans as they matured, resulting in defaults and bankruptcy. In a step forward, White said that 4Q2010 was the first quarter that lenders worked out more mortgages than defaults.
Equity capital is the emerging part of the story, with a lot of both foreign and domestic investors wanting to get into the United States real estate market, although lending is stringent and slowing some investment. Only real estate investment trusts (REITs) are growing, with White noting that REITs were the first segment to deleverage and are the only sector of investors that have good access to channels of capital and credit.
From the residential side, Dr. Crowe said that residential construction was a bit better in 2010 than in 2009. Growth in the housing market usually leads the economy out of a recession, as housing typically grows by 28 percent the year after a recession ends, noted Crowe. However, that didn’t happen with this most recent recession, and the housing market continued to go negative in some regions. Now, the housing market is most dependent on the job market.
The largest concern for home builders is access to credit, as most builders are small companies who depend on lending from local banks. Dr. Crowe forecasts modest growth throughout 2011-2012 of only 3.5 percent annually.
Following the Caucus event in the House, a similar event was held in the Senate in March. Senate Real Estate Caucus co-chairs Senator Ben Cardin (D–Md.) and Senator Johnny Isakson (R–Ga.) led the event. A residential overview was given by Lawrence Yun, chief economist for the National Association of REALTORS. A commercial outlook was presented by James Woodwell, vice president of Commercial Real Estate Research with the Mortgage Bankers Association (MBA), and Lisa Pendergast, managing director, CMBS Strategy & Risk with Jefferies & Company Inc.
During the Senate briefing, Senator Cardin spoke about the impact real estate has on the U.S. economy noting that, “It’s not just the direct jobs, but the indirect jobs. When real estate isn’t doing well, the economy isn’t doing well.” Cardin stressed the need to help small businesses as a means to jumpstart recovery, for both political parties to work together to create a credible plan to deal with the staggering national debt and to reform tax laws.
From the commercial point of view, Woodwell discussed how significant jobs losses and declines in retail sales experienced during the recession had an impact on commercial real estate, noting that vacancy rates have peaked across most property types, exceeding the highs of the early 1990s. Woodwell also explained that while originations were pushed downward by lackluster demand as well as by the recession and the overall credit crunch, originations began to show growth in 2010.
Pendergast noted that while there is tremendous concern about the “wall of debt coming due,” in commercial real estate, much of the debt originated in a more conservative environment 10 years ago and therefore should find refinancing in the current environment. On the flip side, loans coming due that originated five or six years ago will most likely experience an equity gap, where the only options may be default or injection of capital.
National Real Estate Organizations
The coalition of organizations that comprise the National Real Estate Organizations (NREO) works to advance responsible government policies and an economic climate that fosters the long-term health, vitality and job-producing ability of our nation’s real estate industry. Through education forums and symposiums, NREO works with lawmakers to identify, analyze and develop policy recommendations supporting these goals.
Associated General Contractors of America
American Hotel & Lodging Association
American Institute of Architects
American Land Title Association
American Resort Development Association
Building Owners and Managers Association
CRE Finance Council
International Council of Shopping Centers
Manufactured Housing Institute
Mortgage Bankers Association
NAIOP, the Commercial Real Estate Development Association
National Apartment Association
National Association of Home Builders
National Multi Housing Council
National Association of Real Estate Investment Trusts
National Association of Real Estate Investment Managers
National Association of REALTORS®
The Real Estate Roundtable