U.S. commercial real estate markets continue recovery, but vulnerability remains

U.S. commercial real estate markets continue their steady recovery — in keeping with broader macroeconomic trends — but remain vulnerable to policy-related risks such as the scheduled expiration of the federal Terrorism Risk Insurance Act (TRIA) onDec. 31, and the prospect of higher interest rates, The Real Estate Roundtable's latest quarterly Sentiment Survey showed.

The slight upticks in the "Overall" and "Current" indices (to 70 and 72, respectively) since the previous quarter are in keeping with last week's positive reports about higher-than-expected GDP growth during April, May and June, and the creation of 240,000-plus jobs, on average, during each of the past six months. The "Future" index is back up to 67 after a two-point drop last quarter, but is one point lower than at this time last year — reflecting a lingering wariness among industry executives about prospects for a sustainable economic recovery. Data for the current survey was gathered July 7–22 byChicago-based FPL Associates on The Roundtable's behalf.

"Commercial real estate remains on a generally positive path, yet there is significant concern aboutWashington inaction on a range of policy matters affecting our industry," said Roundtable President and CEOJeffrey D. DeBoer. "The most pressing of these is TRIA, whose potential expiration could trigger a wave of technical defaults, renewed problems for banks and bond holders, and lost jobs as financing for new and existing projects dries up," DeBoer explained.

TheSenate voted overwhelmingly (93-4) for a seven-year reauthorizationof the terrorism insurance law onJuly 17. House legislation proposing a five-year extension — as well as program reforms — cleared a key committee in June, but remains in limbo until Congress reconvenes in September.

"Survey respondents also cite interest rate policy — and the broader issue of borrowing costs — as a 'wild card' that could hurt property valuations," DeBoer continued, noting that assets in some markets are still recovering from declines of as much as 40–50 percent during the Great Recession.

Although capital availability is reportedly strong, DeBoer explained that access to capital is still predominantly weighted toward urban "gateway" markets, highly-rated assets, and borrowers with pristine credit scores. As for reports of increased inflows of foreign capital, DeBoer said real estate's share of investment from overseas remains low compared to sectors such as manufacturing, financial services, and energy.

Thus, The Roundtable continues to urge reform of the Foreign Investment in Real Property Tax Act of 1980 (FIRPTA) as a means of attracting new capital that can be used to facilitate debt refinancing, energy efficiency retrofits in commercial and multi-family buildings, and major infrastructure projects. Bipartisan congressional support for FIRPTA reform continues to grow, while the Obama Administration has recognized FIRPTA reform as a potentially positive tool in funding transportation infrastructure repair and modernization.

"Given the uncertainty over TRIA, which is already affecting policyholders seeking to renew terrorism insurance policies beyond year-end — and the prospect of higher borrowing costs as the Fed weighs how to wind down its extraordinary monetary policy stimulus — the lackluster outlook expressed in the latest survey about the coming year is not very surprising," said DeBoer.

What is needed, he concluded, is for "U.S. policymakers to work toward creating a more attractive overall climate for job creation and investment, since these are critical to real estate's health. If real estate is healthy — commercial and residential — so, too, will be the broader economy."

For the full survey report and The Roundtable's 2014 Policy Agenda (Together: Real Estate, Jobs, Economic Growth) and 2014 Annual Report (Leadership-Action-Solutions: Celebrating 15 Years), visit us online at www.rer.org.

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