2011 CRE Outlook: More of the Same?

An interesting report from Deloitte LLP (Commercial Real Estate Outlook: Top Five Issues in 2011) has been making it's way through various publications and media outlets. Boiled down, the authors put forth a generally guarded outlook for the future: while positives do exist in the market, there tends to be a number of unfavorable factors working against them. The million dollar (okay, maybe billion dollar) question is whether  the weight of the positives For example, increased liquidity in the lending/debt markets (which allow for greater transactions and typically lead to more stabilized property values) are dampened by sluggish economic conditions and low levels of job creation. Without a rebound in manufacturing and export levels–as well as disposable incomes at the individual level–retail, office and industrial properties will face an uphill battle. Should we expect 2011 (and even 2012) to be repeats of 2010?

In short, no. The outlook for the near future should be considerably better, which comes as somewhat of an opposite conclusion than that reached by the authors (See here). Take for example, Deloitte's projections for the apartment and hotel market segments. Both Rent (ADR for hotels) and occupancy levels are expected to increase. As the economy begins to recover, many would-be mortgage borrowers will view renting as a hedge against risk and will continue to hold-off on potential purchases. For businesses that are now cash healthy, employee related travel should continue to rise. This is a good for property fundamentals.

Even so, the authors correctly point out that new financial regulations could be an impediment to CRE growth and unseat the positive trends just discussed. Where I differ from the authors, however, is the short-term reaction to uncertainty. For them, the financial regulations that are set to be implemented over the coming years—and in some instances, not until six years from now—will immediately effect industry behavior. But I'm not as convinced. I believe that in the short term, when enforcement of those laws hasn't been established, there will be enough legal ambiguity (which is certainly the case with any law) to cause some risk-seeking behavior. Do you agree?