A panel of real estate experts reported generally good news at the ULI 2011 Fall Meeting in Los Angeles. The U.S. economy has rebounded, and there are few signs at present of a double-dip recession. At the same time, there are clear signs of stagnation and underperformance, and growth has been uneven. Worse, there are still threats to economic recovery from the European debt crisis, and from the politically uncertain environment. Real estate is likely in for a slow recovery, with bright spots in rental housing and other sectors.
Hessam Nadji, managing director of research services for Marcus & Millichap, set the stage by reporting that retail sales are remarkably strong, enjoying a full recovery after a “nosedive” in 2008. Housing is still very weak, but rental housing represents a notable bright spot. While unemployment still lingers near double digits, employment gains have been remarkably broad. Inflation also remains low. Nadji joked that the U.S. economy is a bit like actor Charlie Sheen: “It has great upsides, but it will perform below potential and will be erratic for some time.”
Nadji sees the growth in employment setting the stage for a sustainable recovery in real estate demand, though it will be very uneven. Some metropolitan areas are faring much better in job growth than others, and some formerly strong markets are flat or negative, including Atlanta, Sacramento, and Denver. Apartment vacancies are low, attracting new development in some markets. Office vacancies are up but have stabilized, and he sees a gradual recovery in 2012. Nadji sees a flight to quality and a repricing of risk, reflected in the cap rate trends by market type.
Real estate investment trusts (REITs) and equity funds are increasingly active. REIT prices have recovered from their lows twice as fast as the S&P. The point spread between interest rates and cap rates is at a historic high, signaling buying opportunities. Nadji closed by noting that the United States has a unique demographic asset—it is the only major developed nation with a generation of baby boomers and now 43 million echo boomers who will inherit $43 trillion in wealth.
Moderator Mark Gibson, executive managing director of HFF, asked the panelists for their first-hand observation of trends. John Miller, senior managing directior of Tishman Speyer, reported that his firm has seen a slowdown in office leasing activities in the last 60 days. His brokers think the reasons are obvious—weak job growth, the European debt crisis, and the extremely challenging lending environment for buyers.
Robert Hart, president of Kennedy Wilson Multifamily Management Group, sees a new cycle that has transitioned from cautious optimism to “somewhere between rational and irrational exuberance.” There is pent-up equity chasing opportunities—notably the apartment sector, and notably in gateway cities. There has been a pullback in the larger $100 million to $200 million deals, but no pullback at all in the $50 million deal range.
James Wohlleb, senior vice president of Union Bank, reports that his bank likes the San Francisco Bay region for multifamily, and even some for-sale housing on the peninsula. As a construction lender, they are fortunate to be well capitalized, and they are seeing a notable uptick from last year.
Doug Kiersey, president of Dermody Properties, thinks that “markets are healing.” He sees a bifurcated market, with larger balance-sheet tenants doing well, while smaller ones are still struggling. Whereas prior to 2008, 95 percent of their business was spec and 5 percent was inventory, now the situation has flipped. Kiersey expects that trend to continue, and very little lending on spec for industrial. Starts will not approach 2008 levels for some time, but healthy growth in build-to-suits is seen as good news for them and for their investors.
Gibson commented that the outlook for real estate is bright: there is no shortage of capital, and real estate remains a favored asset class. There is a pause because of volatility in public markets, but looking forward, he sees plenty of product coming to market, and no lack of capital.
Gibson asked the panelists for their assessment of chances of a double-dip recession. None saw a strong possibility. Nadji thinks the economy has passed several critical tests, and there is no more than a 20 to 25 percent chance, largely from lingering risks such as the European debt crisis. But the economy is stuck in an underperforming mode at least until next year’s election, he thinks.