DLA Piper: CRE Optimism Slips
Optimism among U.S. commercial real estate executives continues to slip from its 2014 high point, DLA Piper’s 2017 State of the Market Survey reported.
DLA Piper said 60 percent of executives surveyed called themselves “bullish” about the commercial real estate market, down two percentage points from a year ago and significantly down from 89 percent in 2014. It attributed the drop in part to recent political turmoil, a primary source of uncertainty among respondents.
“But likely more prominent is an awareness among industry veterans that most strong economic cycles haven’t lasted more than seven years–and that the Great Recession officially ended in 2009,” the report said.
Though a majority of real estate investors surveyed called themselves bullish, real estate debt providers and third-party brokerage, property and asset managers were all bearish, DLA Piper said. Real estate developers were essentially split between bullish and bearish outlooks.
“Optimistic respondents cited abundant debt and equity capital available for investment as the top reason for confidence, ahead of the strength of the U.S. economy,” DLA Piper said. “Domestic political and geopolitical uncertainty was the top choice cited among pessimistic respondents, followed by rising interest rates.”
Stephen Quazzo, CEO of Pearlmark Real Estate, Chicago, termed commercial real estate at the “deep end” of the cycle. “I’m not really sure what’s going to end it–but something will, and it will cause a downward adjustment in real estate values,” he said.
Quazzo noted he remains bullish about the short-term commercial real estate outlook given continued low interest rates and other factors. He predicted the end of this cycle will not be as “dramatic” as the last downturn.
Real Capital Analytics reported commercial real estate volume rebounded to $105 billion in the second quarter after a weak start to the year, but the most recent third-quarter numbers are 4.5 percent lower than the second quarter and well below the peaks seen earlier in the decade.
Though optimism has leveled off, DLA Piper said this year’s survey was the fourth in a row with a majority of bullish respondents. “Their confidence is driven mostly by the abundance of debt and equity capital available for investment and the strength of the U.S. economy,” the report said. “On the second point, respondents repeatedly described the United States as a safe haven, particularly for foreign investors looking for strong returns–even amid domestic political turmoil.”
Nearly one-third of respondents predicted foreign investors would be the most active U.S. commercial real estate investors in the next year, edging out private equity and pension funds. Respondents predicted foreign direct investment in U.S. properties will remain strong through the rest of 2017 and Chinese investors would lead the way. “So it’s not surprising that more than half of respondents said the worsening Chinese economy would be the most significant factor to impact the U.S. domestic market this year,” the report said.
