The Top Ten Issues Facing Commercial Real Estate in 2011

December 23, 2010 11:01 PM | 4 min read |

The Top Ten Issues Facing Commercial Real Estate in 2011

The top ten issues facing commercial real estate for 2011, according to Deloitte.

topten 300x221 The Top Ten Issues Facing Commercial Real Estate in 2011

10.  Regulation: Direct and indirect impact of regulation on CRE

Recent healthcare legislation will most likely boost commercial real estate demand, but financial regulations could make it challenging for commercial real estate firms to access necessary capital in the future.

9.  Capital Markets: Lending stabilizes; demand subdued

Stable bank lending and the renewal of CMBS are critical developments for the industry, but the modest level of issuance will not help many CRE borrowers obtain financing, and issuance is expected to be focused primarily on high-quality, stabilized assets. Deleveraging continues, and despite the potential emergence of alternatives, new CRE debt origination is expected to remain subdued until the high level of maturities is reduced to a more sustainable level.

8.  Real Estate Investment Trusts: REIT rebound continues

The recent REIT rebound has been driven by investor realization that REITs took on far less debt and have positioned their balance sheets well to take advantage of developing CRE opportunities. Recently, REITs have outperformed competing asset classes making the category more attractive to investors looking to invest in any potential rebound in CRE and hedge against stock market volatility.
7.  CRE Fundamentals: Fundamentals moderating, but recovery may be slow

There are signs of improvement in fundamentals such as occupancy and rental rates, and moderation of the two, in certain property types and geographies. However, prospects for a majority of indicators reflect low and slow growth.
• Office fundamentals have deteriorated significantly over the past two years, but there are some signs that a slow recovery may begin as early as 2011.
• The retail space continues to face substantial demand-side challenges: a decline in retail sales following high unemployment, low consumer confidence levels, and reduced discretionary spending.
• The apartment sector is benefiting from a slight increase in demand complemented by low supply, as tight underwriting standards continue to favor renting and impact home-buying decisions.
• The industrial sector is experiencing a modest increase in leasing activity  as manufacturers replenish depleted inventory levels.
• Demand for lodging continues to recover due to improved business and leisure travel.

6.  Economy: Trajectory of economic fundamentals remains uncertain

Slight GDP growth, subdued consumer spending, volatile employment and weak performance of the housing sector indicates a large short term recovery is unlikely.  While the economy does not appear to be a great threat to the CRE market, it won't be any help either.

5.  Deal Flow: Distress fuels modest revival in transactions

Transactions have emerged as a bright spot with improvement in the number and value of transactions driven by public and foreign investors.  While distressed opportunities have spurred deals, they have also resulted in wide bid/ask spreads.

4.  Looming Debt: High maturities remain a challenge

The high level of maturing debt over the next several years is a significant barrier to recovery.  In addition to commercial mortgage-backed securities (CMBS), loan delinquencies and CRE loan defaults, there is also an increase in strategic defaults as more CRE borrowers exit profit-draining investments to divert funds to performing projects or shareholders.
3.  Lender Lenience: Impact of “amend and extend”

This downturn has made banks unlikely to extend the terms of loans to return full value on principal and interest accrued, which might keep delinquencies and defaults in check until the economy recovers.  This also puts a floor under the market, making it difficult to know when the bottom has been reached.

2.  Current State of CRE: Prevailing uncertainty, as downturn defies expectations

The current cycle is not following historic tendencies because it was fueled more by overleveraging than overbuilding, creating a dynamic involving flexible lenders, stubborn owners, and expectant investors.  CRE fundamentals and capital markets metrics indicate that the worst may be over, with sharp declines showing signs of leveling off.

1.  Globalization: Positive signs for global CRE

Foreign acquisitions are a key component to recovery for the U.S. CRE market, which will benefit from pent - up demand from foreign investors seeking to diversify. As the global market begins to recover, the Asia Pacific region is expected to be a catalyst for growth, both as a destination and a source of investment into the U.S. market, while more traditional investors from Australia and Germany reduced allocations due to trouble in their home markets.



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