As the economy shows signs of substantial improvement, the commercial real estate industry is emerging from a transitional phase in 2010 to a recovery stage in 2011. Institutional-quality real estate assets in primary markets have begun to stabilize and appear to be poised for recovery.
However, several uncertainties at both the macro and fundamental levels remain. Here we highlight the top 10 challenges facing our industry in 2011:
1. Economic recovery — Recent evidence suggests that the U.S. economic recovery is gaining strength. Corporate earnings are strong, with record amounts of cash on firms’ balance sheets.
2. Residential housing market — With the help of government tax incentives, the housing market has shown some signs of stability.
3. Job growth — During the recession of 2008-2009, the economy lost a total of 8.4 million jobs. In 2010, we regained approximately 1.1 million jobs. Private sector employment has shown decent growth..
4. Government and Fed policies — The Federal Reserve’s QE2 program of purchasing $600 billion in long-term Treasuries and the extension of the Bush tax cut program have without a doubt provided a significant short-term boost to business and consumer confidence.
5. Inflation and interest rates — The latest inflation data suggests low inflationary pressure for now. Several factors are contributing to this, including the high unemployment rate, high worker productivity, underutilized manufacturing facilities, and low-cost imports from emerging countries.
6. European sovereign debt crisis — Since the Greece sovereign debt crisis in April 2010, a few other European countries such as Ireland, Spain, and Portugal have also experienced signs of distress.
7. Geopolitical risks — A few geopolitical uncertainties are posing potential risks. In particular, tensions between Iran and Israel, conflicts between North and South Korea, and the possibility of a terrorist attack could cause significant volatility in the marketplace and undermine public confidence.
8. Capital market environment — The commercial real estate capital markets have improved remarkably over the past 18 months. Lenders, especially life insurers and foreign banks, have re-entered the commercial mortgage market, creating more choices for borrowers as well as lower mortgage rates and higher loan-to-value ratios for high-quality assets.
9. Loan maturities — Maturing commercial real estate debt remains a daunting challenge facing the industry. Over $1.1 trillion of debt is scheduled to mature from 2011 through 2014.
10. Real Estate fundamentals — 2010 was a transition year for commercial real estate with vacancy rates of all property sectors bottoming. Corporate tenants are taking advantage of lower rents to “right-size” or consolidate their space. As a result, leasing activity has surged over the past three quarters.
Nonetheless, large shadow inventory still remains a challenge, especially in the office sector. In this past downturn, many big companies went through large-scale layoffs without shedding significant spare space. The pace of occupancy recovery could be moderate as a result.
With improving fundamentals, we believe the commercial real estate market will attract significantly more investor interest and new capital. Investment activities will likely expand beyond the traditional core into the lesser-quality assets and secondary markets in 2011. Please visit our website at http://www.commercefinancialinc.com and connect with us on Linkedin http://www.linkedin.com/in/commercefinancialinc
