Looking for Signs of a Better 2012: The Recovery Continues.
(For print version - click here) Two months into 2012, and it is still difficult to see what kind of year real estate investors¬†can expect. General sentiment may be improving. A recent quarterly pulse survey of investors conducted by the National Association of Real Estate Investment Managers (NAREIM) and FPL Advisory Group shows a significant turnaround in confidence since the final quarter of 2011. A majority of respondents are increasing their hiring this year, and over 90% expect an increase in transaction volume in 2012. But how can that be?¬† The economy, though no longer on life-support, doesn‚Äôt quite feel robust. 8.3% unemployment, though an improvement compared to last year isn‚Äôt exactly wonderful. The European debt problem hasn‚Äôt been solved, though there are many working on it. The cost of energy is getting jumpy, debt problem in the U.S. aren‚Äôt exactly behind us and we‚Äôre facing an election year, with all the hyperbole, uncertainty and inactivity associated with that. Why so positive? I recently spoke with a few members of NAREIM to get their perspectives on the state of investors‚Äô confidence at the beginning of 2012. Ryan Krauch, Principal of Mesa West Capital immediately took the long view, ‚ÄúI think these sentiments reflect the fact that there was not really anywhere else to go but up. That said, I think that although we will see a relatively better environment this year than previous years, it will still be far behind any normalized standard.‚Äù¬† Ryan didn‚Äôt see significant improvements in the near to mid-term. In his words, ‚ÄúWe need a lot more job growth and spending to kick in before real estate will see any sort of meaningful recovery in fundamentals.‚Äù Scott Onufrey, Senior Vice President at Kimco Realty pointed out that improved confidence was justified if one considered the entire investment environment. ‚ÄúReal estate offers terrific risk adjusted returns relative to other asset classes today. Treasury yields are 2.0% while good real estate can be acquired yielding in excess of 6%. In addition, financing properties is getting easier, so if you need a mortgage, there are lenders that will provide capital at 4.5% for ten years.‚Äù And there may be signs of an improved CMBS market. According to Greg Michaud, Senior Vice President and Head of Real Estate Finance at ING Investment Management, ‚ÄúThe recent Deutsche Bank AG/Morgan Stanley CMBS deal was a huge success ‚Äì indicating that there will be ample liquidity in the market for the wave of refinancing coming to the market. Another good sign is that rates from CMBS lenders are coming in from 5.5% to 5.75% by 100 basis points ‚Äì that will help challenged deals refinance.‚Äù At the same time, there may be signs that investors are gaining confidence in non-core assets. According to George Pandaleon, President of Inland Institutional Capital Partners, ‚ÄúInvestors are moving beyond core to secondary markets and value-added investments. Cap rate compression seems to have abated (albeit holding at very low levels for the best assets).‚Äù¬† There may also be a long awaited improvement in fundamentals in the offing. According to George, ‚Äú In apartments, retail and CBD office (depending on the market) we are seeing clear signs of improving operating fundamentals ahead.‚Äù Jeffrey Newman, CFO at IDS Real Estate Group also sees signs of improving fundamentals, ‚ÄúLandlord leverage is gradually getting traction‚Ä¶not huge traction, but some:¬† lease concessions are diminishing, lease rates are strengthening. Obviously this is market and product dependent, but we are seeing interest in spec industrial from capital and some demand from tenants.‚Äù It is logical then, to expect some improvements in deal flow, and several NAREIM members have seen an increased amount of deals in the first quarter. There are still reasons to be careful. Kim Woodrow, Global COO at LaSalle Investment Management is cautiously optimistic given the improvements noted above. However, there are reasons to be concerned, including the cooling of Asian investment markets, the continued Euro-zone problems and ‚Äúwe are all holding our breath regarding the U.S. Presidential election.‚Äù Paul Nasser, COO of Intercontinental Real Estate Corporation agrees with Kim, ‚ÄúThere are a number of issues that remain unresolved, which could derail any recovery and even throw us into another recession such as the Euro Crisis, the Middle East issues, true unemployment, cost of oil, rising interest rates and political unrest in the U.S. So while I am hoping for a strong recovery, I remain very concerned about the immediate future.‚Äù Jeff Newman pointed out one more reason to be concerned this year, ‚ÄúOutside of the tech driven markets, what is the future of office leasing demand and how far tenants will be able to go with their interest in lease flexibility, (i.e. lease termination and contraction rights)?¬† This negatively affects value and reduces financing options, sometimes significantly. I‚Äôm not sure that this issue is getting the recognition it deserves.‚Äù While not conclusive, the picture drawn by real estate investment managers for this year suggests some reason for optimism, tempered by a real wariness. Bill Carlson, Senior Managing Director of Cigna Realty Investors, summarized it well when he said, ‚ÄúWe can operate our real estate businesses in any environment - good or bad - as long as it's rather stable. Things have stabilized a little, values don't appear to be falling, debt is cheap where it can be had, and trades are happening. Only the economy remains unclear and unsettled‚Ä¶but it may be inching forward slowly.‚Äù These are interesting times to invest in real estate.